Contents · Web viewAustralia’s crude oil and condensate production is forecast to decrease by 8...

Resourcesand Energy

QuarterlyJune Quarter 2013

Acknowledgements

The macroeconomic outlook, the individual commodity outlooks and the reviews have identified BREE authors. The statistical tables were compiled and generated by the Data & Statistics Program at BREE and led by Geoff Armitage. Design and production was undertaken by the Media and Parliamentary team at the Department of Resources, Energy and Tourism, Tom Shael and the BREE Data & Statistics Program.

BREE 2013, Resources and Energy Quarterly, June Quarter 2013, BREE, Canberra, June 2013.

© Commonwealth of Australia 2013

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ISSN 1839-499X (Print)ISSN 1839-5007 (Online)Vol. 2, no. 4Postal address:Bureau of Resources and Energy EconomicsGPO Box 1564Canberra ACT 2601 AustraliaEmail: [email protected]: www.bree.gov.au

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mailto:[email protected]

ForewordThe June release of the Resources and Energy Quarterly provides an update of BREE’s current and next financial year projections that were released in March 2013. The current release occurs at a time of considerable uncertainty about the prospects for the world economy. The past quarter, in particular, has witnessed large fluctuations in equity and foreign exchange markets. These fluctuations and changes in sentiment have negatively affected the price of some resource commodities, especially precious metals and base metals.

In addition to providing the latest projections on commodity prices and volumes, the current release includes three review articles. These reviews include contributions on: the value of Australia’s mineral and energy resources over the period 1990 to 2012; a review of productivity in Australian mining; and an overview of key facts, figures and trends on energy in Australia.

Recent evidence of softening in the Chinese economy, and concerns the tapering off of the US Federal Reserve’s quantitative easing before the end of 2013, have contributed to large fluctuations in global equity markets and a more than a 10 per cent depreciation of the Australian dollar relative to the US dollar from its average first quarter 2013 value. A depreciating dollar increases the Australian dollar value of resources and energy exports denominated in US dollars. Unfortunately for Australian commodity exporters, uncertainty about growth prospects in China and a recession in the euro zone economy have been associated with a weakening in several key commodity prices. The biggest fall in price has been for gold which fell in value by 12 per cent in one week in mid-April, but they has also been substantial dips in the spot price of iron ore falling from US$152 a tonne FOB in February to US$103 in June 2013 and thermal coal declining from US$91 a tonne FOB Newcastle in the March quarter of 2013 to around US$85 a tonne in June 2013.

The net result of actual and projected falls in key commodity prices is that BREE’s forecast Australian resources and energy export value in nominal dollars for 2012–13 has been adjusted downwards from $186 million in the March release of the Resources and Energy Quarterly to $177 billion in this release. An assumed depreciation of the Australian-US dollar exchange rate for the financial year 2013–14 will provide additional support for Australian dollar value of resources and energy exports. For the next financial year, BREE forecasts resources and energy exports to increase relative to 2012–13 in nominal dollars by about 11 per cent, or some $20 billion, to total about $197 billion.

Quentin Grafton

Executive Director/Chief Economist

Bureau of Resources and Energy Economics

ContentsForeword..................................................................................................................................3

Macroeconomic outlook update and energy and minerals overview.......................................5

Energy outlook........................................................................................................................13

Oil.......................................................................................................................................13

Gas......................................................................................................................................16

Thermal coal.......................................................................................................................17

Resources outlook..................................................................................................................20

Steel and steel-making raw materials.................................................................................20

Gold....................................................................................................................................25

Aluminium..........................................................................................................................28

Alumina...............................................................................................................................29

Copper................................................................................................................................31

Nickel..................................................................................................................................34

Zinc.....................................................................................................................................37

Reviews...................................................................................................................................40

The value of Australia’s mineral and energy resources......................................................41

Australian mining productivity............................................................................................51

Energy in Australia 2013.....................................................................................................57

Statistical tables......................................................................................................................65

BREE contacts.........................................................................................................................67

Macroeconomic outlook update and energy and minerals overviewNhu Che, Tom Willcock and Pam Pham*

Global economy: improvements with different speeds of recovery

Global economic growth is forecast to improve to 3.3 per cent in 2013, and increase to 4.0 per cent in 2014. Nevertheless, the pattern of economic recovery remains divergent across countries and regions.

The previously observed two-speed recovery which has seen emerging markets and developing economies growing more strongly than advanced economies is becoming a three-speed recovery. Developing economies are still growing strongly, and are expected to support future global growth. By contrast, the economic fragility of the euro zone continues but in most non-European OECD economies, particularly the US, the outlook is more positive and improving.

BREE assumes that developing non-OECD economies will grow at 5.8 per cent in 2013 and 6.2 per cent in 2014. Economic growth in the US is forecast to be 1.9 per cent in 2013 and 3.0 per cent in 2014. By contrast, growth in Western Europe is forecast to be 0.1 per cent in 2013 and 1.0 per cent in 2014.

In advanced economies outside of Europe activity has stabilized and has picked up in emerging markets and developing economies, supported by monetary policies, better financial conditions and renewed confidence. This pickup follows a slowdown in 2012. Five key medium-term risks, as identified by the IMF, remain: (1) very low growth or stagnation in the euro zone; (2) fiscal challenges in the US and Japan; (3) unexpected increase in inflation in key advanced economies; (4) unexpected consequences of unconventional monetary policy; and (5) potential lower growth in output in key emerging market economies.

Arguably, the greatest risk is low growth in Europe. According to the IMF, the euro zone economy is forecast to shrink in 2013 as Greece, Portugal, Italy and Spain contract further. While France’s output is forecast to decrease slightly (by 0.1 per cent) in 2013, the IMF forecasts it to grow at 0.9 per cent in 2014. In the near term, conditions in the euro zone will remain strained: sovereign debt burdens may deteriorate; banks will continue to face deleveraging pressure, elevated funding costs, deteriorating asset quality, and weak profits; and many corporations and households carry heavy debt burdens. These factors will likely lead to poor investment and economic growth over the foreseeable future.

The spill-over from the ongoing debt crisis in the European Union could have knock-on effects for large exporting countries, such as China. This, along with some lingering concerns about Japanese monetary expansion and US fiscal policies, remain key issues over the short-term to medium term. Nevertheless, assumed robust

* Special thanks to Quentin Grafton, Wayne Calder and BREE colleagues for their comments and contributions to this paper.

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growth in emerging economies in both 2013 and 2014 is expected to support higher resource and energy volumes over the foreseeable future.

US real gross domestic product increased at an annual rate of 2.4 per cent in the first quarter of 2013 and is assumed to be around 1.9 per cent in 2013. Positive economic indicators from the US include increased business investment, reduced private debt levels as a proportion of GDP returning to 2003 levels, and after-tax income growing at its fastest rate since the Global Financial Crisis. Ongoing improvements in global and domestic economies underlies the assumed higher growth rate of 3.0 per cent in 2014.

Figure 1: World economic growth

Please refer to page 2 of the Resources and Energy Quarterly – June quarter 2013 PDF version.

Emerging economies, particularly those in Asia, are assumed to contribute an increasing share of world economic growth with 5.8 per cent and 6.2 per cent annual economic growth in 2013 and 2014. Growth in Latin American economies is assumed to be 3.4 and 3.9 per cent in 2013 and 2014, respectively. In non-OECD Asia, economic growth is assumed to recover slightly from 2012 with an overall average annual growth rate of 7.2 per cent in 2013. India and China, in particular, are expected to maintain very high growth rates in 2013 and 2014 of 6.0 and 6.2 per cent (India), and 7.5 per cent in both years (China).

Table 1: Key macroeconomic assumption for resources and energy

Please refer to Excel sheet Table 1 in the Resources and Energy Quarterly – June quarter 2013 Commodity data Excel workbook.

Economic prospects in Australia’s major mining export markets

Non-OECD economies

The economic outlook for Australia’s key trading partners in non-OECD Asia remains positive with assumed growth of 7.2 per cent for the region for 2013.

While Chinese economic growth is expected to remain robust current growth is less than what had been forecast by most Chinese economy analysts. A number of Chinese Government policies could constrain growth in 2013 to levels below the average rate over the past decade, including a tightening of credit growth. Chinese concerns about wealth disparity, the environment and social outcomes are changing the central Government’s focus from investment driven growth of recent decades towards longer term domestic consumption and services driven growth.

Indian economic growth declined in 2012, in part, as a result of government policies intended to combat rising inflationary pressures, but also due to weaker external demand and a decline in business confidence. Economic growth is assumed to pick up to 6.0 per cent in 2013 and 6.2 per cent in 2014 due to increasing domestic

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consumption and government policies designed to fast-track key infrastructure investments.

Growth prospects for the ASEAN region are robust. Economic growth in the five largest member nations is assumed to be about 6 per cent in 2013. Indonesian economic growth, in particular, is assumed to remain robust as rising wages and confidence support growing consumer and business demand.

Chinese Taipei grew at a slightly lower rate in the first quarter of 2013 than anticipated as export and domestic demand flagged. Nevertheless, growing global trade, in part driven by US demand, should lead to higher export growth and increased consumption over the coming year.

Figure 1: Economic growth of major export markets for Australia’s resources and energy commodities


OECD economies

Economic growth across the OECD is assumed to be around 1.2 per cent in 2013, considerably lower than assumed in the March 2013 Resources and Energy Quarterly. This downgrade reflects a number of sizeable ‘headwinds’ facing key OECD economies, particularly in Europe.

Prospects for the euro zone are still muted. Low growth, subdued inflation and poor output and competitiveness are systemic in some European countries. Cyprus’ banking meltdown and the ensuing austerity measures have been yet another reminder of the challenges facing the European Union. Germany remains a growth engine in Europe with economic growth assumed to be around 0.6 per cent in 2013, increasing to 1.5 per cent in 2014.

The outlook in the US is markedly different to Europe. A declining trend in unemployment, increased consumer spending and a rebounding housing sector (exemplified by double digit growth in the first quarter of 2013) have improved business and consumer sentiment. Tighter fiscal policy which includes the sequester that cut $85 billion from federal Government spending from March 1 2013 and increased taxes have not, so far, impeded economic growth. Cheap unconventional energy sources are helping to improve competitiveness in American manufacturing. Rising labour costs in other parts of the world are also serving to return some jobs to the US.

Japan has recently undertaken a program of quantitative easing, dubbed ‘Abenomics’, after Prime Minister Shinzo Abe. This is an effort to avoid deflation and kick-start economic growth. Signs of wage growth, improving consumption and a falling yen (potentially a big boost for an export oriented economy) are positive, but risks associated with repaying high public debt and stock market volatility raise doubts about the long term sustainability of Abenomics.

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The Republic of Korea’s economy is assumed to improve in 2013, with growth of 2.8 per cent. Expansionary government measures, including initiatives to improve innovation and manufacturing, and an expected increase in global trade are key drivers to the assumed improvement. Despite the optimism, some challenges remain, particularly in the form of export competition from Japan (which has been boosted by the falling yen), and high household debt that is squeezing domestic consumption.

Commodity prices

The first half of 2013 has seen considerable volatility in most metal and bulk commodities, generally to the downside. Gold prices, in particular, have plummeted in recent months. Copper, nickel and zinc prices have also fallen as a result of increasing supply and weakening demand growth.

Concerns over moderating Chinese economic growth weigh on almost all commodity prices, and particularly iron ore which is forecast to trend downwards (although year-to-year volatility will remain). Thermal coal prices are expected to weaken as increased Australian supply competes with higher US exports and metal prices are expected to be stagnant or decline as increased supply enters the market.

Australian economic prospects

According to ABS data, the Australian economy grew at a rate of 3.1 per cent in 2012. In terms of real GDP, based on purchasing power parity (PPP), Australian economic growth for 2011-2012 was 2.9 per cent. BREE assumes Australian economic growth of 3.0 per cent in 2012-2013 and 2013-2014 in PPP terms and in 2012 prices (see Table 2).

Over the outlook period, growth in the Australian economy is expected to be supported by mining-related activities and a possible uptick in consumption associated with record low interest rates. BREE estimates that as of May 2013 the stock of investment in committed resources and energy projects remained at about $268 billion. Mega projects valued at over $5 billion account for around 80 per cent of the $268 billion in committed investment. High levels of mining investment, largely driven by the record levels of already committed resources projects, are expected to continue to contribute to robust growth in resource export volumes over the medium term. In the short term, lower interest rates appear to be supporting the housing industry and, along with population growth, will help to support domestic consumption.

Table 2: Australia's key macroeconomic assumptions for resources and energy


The Australian dollar remained high through early 2013, trading between US 103c and US 105c with the trade-weighted index ranging around 78-79 from January and

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April. The Reserve Bank of Australia’s (RBA) decision to cut the official cash rate to a record low of 2.75 per cent on 8 May 2013, improving economic signs from the US, expectations that the US quantitative easing program may start to taper off later in 2013 and concerns over Chinese economic growth have led to sharp falls in the Australian dollar.

Despite recent falls, the Australian dollar is expected to average around US 103c through 2012-13; because of its high value in the first three quarters of the financial year (see Figure 3). Nevertheless, the possibility of further declines in the domestic interest rate combined with US economic recovery are assumed to result in a weaker Australian dollar in the second half of 2013 and into 2013–14.

Figure 3: Australian exchange rate


Box 1: A tale of two currencies

A foreign exchange rate is the amount of foreign currency that can be purchased for a unit of domestic currency. This pairwise rate of exchange is determined by many factors including interest rates, the expected rate of inflation, debt levels, and expected growth rates between the two countries, as well as compared with other economies.

The world’s most important currency in terms of global trade is the US dollar. This is because many goods and services, including key resource and energy commodities, are denominated or priced in terms of US dollars. Consequently, as a domestic currency increases (decreases) in value relative to the US dollar, the export value of goods and services that are sold in US dollars decreases (increases) after conversion into the domestic currency. Thus, even if the US dollar price of an exported good remains unchanged, but the domestic currency appreciates, or increases in value relative to the US dollar, the return to the exporter in domestic currency terms will decline. Similarly, if imported goods are denominated in US dollars and the domestic currency appreciates relative to the US dollar, the cost to importers in domestic currency terms declines.

Many of Australia’s resources and energy export commodities are priced in US dollars. Thus, although the US dollar price of key commodities rose from the start of the Millennium Mining Boom, the gain to Australian exporters, in Australian dollar terms, was partially offset by an appreciation in the Australian dollar (see Table 3) which increased from an annual average of 0.52 in 2001 to 1.04 in 2012.

Table 3: Annual average Australian dollar exchange rate relative to US dollarYear 200

0200

1200

2200

3200

4200

5200

6200

7200

8200

9201

0201

1201

2

US$/A$

0.58 0.52 0.54 0.65 0.73 0.76 0.75 0.84 0.85 0.79 0.92 1.03 1.04

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Source: RBA.

The appreciation of the Australian dollar since 2001 represents the foreign exchange market’s view of the relative value of the Australian dollar to the US dollar. This appreciation is attributed to the rise of key commodity prices over the decade. Given that resources and energy exports account for about 60 per cent of the total value of Australia’s goods and services exports, these price increases provided strong support for the Australian dollar. This is because, typically, a 10 per cent increase in the terms of trade in Australia is associated with a 7.5 per cent increase in the nominal exchange rate.

When commodity prices in US dollar terms fell sharply in late 2008 and early 2009 the Australian dollar also depreciated and fell to a low of 0.61 in October in 2008. This provided an important ‘cushion’ for Australian exporters in terms of their revenues in Australian currency terms. The subsequent rise in commodity prices from 2009 to 2011 and the strength of the Australian economy post-GFC relative to key developed economies, including the US, has provided additional support to the Australian dollar over the past few years. Further, over the period 2011–2012 the Australian dollar acquired a ‘safe haven’ status relative to other currencies, especially in countries or regions with large public debts.

In recent months the Australian dollar has depreciated relative to the US dollar. This can be attributed to several factors. First, lower than expected growth in the Chinese economy in the first quarter of 2013, although China is still experiencing rapid GDP growth of about 7.5 per cent. Second, the prices of some key commodities exported from Australia have fallen in US dollar terms. Third, the real interest rate differential between Australia and the US has declined over the past few quarters. Fourth, quantitative easing initiated in the US in response to its severe recession following the GFC is expected begin to taper off before the end of 2013 and possibly end by mid-2014 if the US unemployment rate trends downward as expected. As a result, the Australian dollar has depreciated about 12 per cent against the US dollar, falling from an average of 1.04 US dollars per Australian dollar in the first quarter of 2013 to about 0.92 US dollars per Australian dollar as of 24 June 2013.

The market view is that the Australian dollar is expected to decline in value, or depreciate further, relative to the US dollar over the next 12–18 months. Should this depreciation occur, it would have the effect of increasing the Australian dollar returns from the export of key commodities, such as iron ore and coal, that are sold based on US dollar denominated prices. For instance, in terms of Australia’s iron ore exports, an assumed depreciation of the Australian/US dollar exchange rate from an average of 1.03 in 2012–13 to 0.94 in 2013–14 alone would increase the value of iron ore exports by about A$6 billion. Should the Australian dollar decline below the assumed exchange rate of 0.94 US dollars per Australian dollar, there would be additional support for the value in Australia dollars of export commodities denominated in US dollars.

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Australian resources and energy commodities production and exports

Overall, Australian mine production is forecast to increase by 4 per cent in 2013–14 relative to 2012-13, primarily due to a 3 and 5 per cent increase in the output of energy and mining commodities, respectively (see Figure 4). Production of gas, iron ore and copper (refined output) are forecast to increase by 20, 13 and 10 per cent, respectively, relative to 2012–13. Increases in production of oil of 5 per cent and thermal coal of 3 per cent growth are projected in 2013–14 relative to 2012–13.

Figure 4: Australian mine production


Figure 5: Australian energy and minerals export earnings


In 2013–14, total export earnings for energy and mineral commodities in Australian dollar terms are forecast to increase by 11 per cent from 2012–13 to total $197 billion. Metal and other mineral exports are forecast to increase by 14 per cent to $120.2 billion as the result of increased values of iron ore, alumina and zinc exports. Energy commodity export earnings are forecast to increase by 10 per cent to $77.7 billion, primarily as a result of forecast increased value of gas, thermal coal, metallurgical coal and oil.

Small decreases in the value of uranium, aluminium and gold export earnings will be more than offset by large gains in alumina (up 23 per cent to $6.8 billion), zinc (up 23 per cent to $2.5 billion), iron ore (up 17 per cent to $66.8 billion), LNG (up 18 per cent to $17.9 billion), thermal coal (up to 9 per cent to $17.7 billion), metallurgical coal (up 8 per cent to $23.5 billion) and oil (up 5 per cent to $14.0 billion) (Tables 4 and 5).

Over the outlook period, energy and mineral commodity exports are projected to remain robust, largely driven by significant increases in iron ore, coal and LNG exports. The detailed outlook for major energy and minerals commodities is outlined in the Energy Outlook and Resources Outlook sections.

Table 4: Australia’s resources and energy commodity exports, by selected commodities


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Table 5: Outlook for Australia’s resources and energy commodity sector


Major Australian commodity exports


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Energy outlook

Oil

Pam Pham and Alex Feng

Oil prices

Reductions in demand as a result of lower economic growth in major economies and reduced import demand in the US have contributed to lower oil prices. In 2013, the real West Texas Intermediate (WTI) price is forecast to increase slightly, relative to 2012, to an average of US$94 a barrel, while the real Brent price is forecast to average US$108 a barrel in the same year. In 2014, the real WTI and Brent prices are projected to increase marginally to US$96 and US$115 a barrel, respectively, given the assumed improvement in world economic growth.

Figure 1: Real WTI and Brent oil prices


World oil consumption

Although oil demand in OECD economies was weaker in the first half of 2013, relative to 2012, it is projected to recover in the second half of 2013 due to an assumed improvement in global economic activity in the last two quarters of 2013. As a result, world oil consumption is forecast to increase by 1 per cent to average 90.7 million barrels a day in 2013 (Figure 2). In 2014, world oil consumption is projected to increase by 1 per cent to average 91.5 million barrels a day, supported by an assumed strengthening of economic growth in 2014.

Figure 2: Oil consumption in OECD and non-OECD economies


In 2013, oil consumption in non-OECD economies is forecast to increase by 1 per cent, and to average 45.1 million barrels a day as a result of improving economic growth. In 2014, oil consumption is projected to increase at a similar rate to average 46.5 million barrels a day. Most of the growth is expected to come from China which is projected to consume an average of 9.9 million barrels a day in both 2013 and 2014. Oil consumption in India is projected to rise by 3 per cent to average 3.8 million barrels a day in 2013 and to remain at a similar level in 2014. Oil consumption in the Middle East is forecast to average 7.8 million barrels a day in 2013 and is projected to increase by 2 per cent to reach 8 million barrels a day in 2014.

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Oil consumption in OECD economies is forecast to decrease 1 per cent and to average 45.5 million barrels a day in 2013 as increased demand in Japan offsets lower consumption in the US and Europe. A gradual recovery in the Japanese nuclear power generation is forecast to reduce oil demand in 2014. As a result, oil consumption in OECD economies is projected to decrease marginally and to average 45.1 million barrels a day in 2014. Increases in distillate and liquefied petroleum gas consumption at the expense of oil consumption in the US will also weaken OECD demand.

World oil production

World oil production is forecast to average 91.5 million barrels a day in 2013, with non-OPEC countries’ production averaging 54.5 million barrels a day (Figure 3). Production from OPEC countries is forecast to average 37 million barrels a day in 2013. World oil production is projected to remain unchanged at 91.5 million barrels a day in 2014.

Figure 3: World oil supply in OPEC and non-OPEC economies


In 2013, non-OPEC’s oil production is forecast to increase by 2 per cent, relative to 2012, to average 54.5 million barrels a day. The production gains from the US, Canada and Brazil are expected to contribute over half of this increase. Rising unconventional supplies, mainly from the US’s light tight oil, Canadian oil sands and natural gas liquids, is expected to support non-OPEC’s 2014 oil production. In 2014, oil production from non-OPEC economies is projected to increase by 2 per cent to total 55.6 million barrels a day.

OPEC oil production is forecast to fall by 2 per cent to average 37 million barrels a day in 2013. In 2014, oil production from OPEC is projected to decrease further to average 36 million barrels a day. This expected decline is the likely outcome of falling production from Iran due to sanctions and lower output from Saudi Arabia.

Australian production and exports

Australia’s crude oil and condensate production is forecast to decrease by 8 per cent in 2012–13, relative to 2011-12, to total 22.3 gigalitres. This decline is primarily due to continuing declines of production from maturing fields. In 2013–14, crude oil and condensate production is projected to increase by 5 per cent to total 23.3 gigalitres with the commencement of the Montara-Skua. Increased production will also be supported by the start-up of the Fletcher-Finucane and Coniston projects in 2013.

In 2012–13, Australia’s exports of crude oil and condensate are forecast to increase by 2 per cent, with the export value increasing by 1 per cent, relative to 2011–12, to total $13.4 billion. In 2013–14, crude oil and condensate exports are projected to

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increase by 5 per cent to total $14 billion as a result of projected higher export volume.

Figure 4: Australian crude oil and condensate exports


Table 1: Oil outlook


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Gas

Nhu Che and Caitlin McCluskey

Australian gas production

In 2011–12, Australian gas production was about 55.8 billion cubic metres (revised up from the March edition of Resources and Energy Quarterly). In 2011–12 coal seam gas production increased about 1.7 billion cubic metres compared with 2010–11.

In 2012–13, Australia’s gas production is forecast to increase by 17 per cent, relative to 2011–12, to total 65.4 billion cubic metres. In 2013, a number of new projects and expansions including Macedon (WA), North Rankin B (WA) and Turrum (VIC) will commence and will underpin increased production. In 2013–14 Australian gas production is projected to be about 78.3 billion cubic metres (see Table 2).

Australian LNG exports

Australia’s LNG exports were 19 million tonnes in 2011–12. Australian exports of LNG are forecast to increase by 26 per cent in 2012–13 to total 24 million tonnes. In 2013–14, Australian exports are forecast to increase by a further 4 per cent to total 25 million tonnes as a result of increased production at the Pluto facility. The value of Australia’s LNG exports is forecast to increase to be about $15.2 billion and $18 billion in 2012–13 and 2013–14, respectively (see Figure 1). Forecast increases in export earnings are the result of expected increases in Australian export volumes and projected higher LNG prices over the outlook period from 2012–13 to 2013–14.

Figure 1: Australia’s LNG exports


Table 1: Gas outlook


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Thermal coal

Tom Shael

Thermal coal prices

The 2013 Japanese Financial Year (JFY, April 2013 to March 2014) contract price settled at US$95 a tonne, a slight premium compared with spot prices at the time of negotiations. Contract prices in JFY2014 are forecast to settle at around US$92 a tonne, in line with expected continued soft spot prices over the near term.

Spot prices for thermal coal free on board (FOB) Newcastle averaged US$91 a tonne in the March quarter of 2013 which was higher than the average of US$84 in the December quarter of 2012. Spot prices have since declined and have been around US$85 a tonne in the June quarter of 2013. At these prevailing spot prices many producers’ margins are under pressure, including mines in Australia and the US.

Figure 1: JFY thermal coal prices


World trade in thermal coal

In 2013 trade of thermal coal is forecast to increase by 3 per cent, relative to 2012, to total 988 million tonnes. In 2014, total trade is forecast to increase by a further 3 per cent to total 1014 million tonnes. Growth in both years will be supported by robust import demand into emerging economies, particularly India and China.

Imports

Increases in world import demand for thermal coal is forecast to be underpinned by growth in imports into China and India. China is forecast to increase its imports by 9 per cent in 2013, relative to 2012, to total 228 million tonnes. Further growth of 7 per cent is forecast in 2014, resulting in total imports of 243 million tonnes. India’s thermal coal imports in 2013 are forecast to increase by 12 per cent, relative to 2012, to total 113 million tonnes. Imports into India are forecast to increase by a further 10 per cent in 2014 to reach 124 million tonnes.

Recently, China’s National Energy Agency (NEA) put forward a proposal that would impose a minimum standard on coal imports. This standard would mandate that imported coal must contain a minimum of 4540 kcal/kg, a maximum of 25 per cent ash and 1 per cent ash and sulphur, respectively. The main cited purpose behind the proposal is to reduce pollution; however, it would also benefit local coal producers who would be subject to a lower quality control standard on their coal.

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If the Chinese Government implemented these import standards, coal exporters that offer low calorific content coal, such as those in Indonesia, or high sulphur coal, such as those in the US, would be adversely affected. Conversely, exporters of higher quality coal, such as those in Australia, South Africa and Colombia, could gain through potentially higher exports to China.

In 2013, imports into the EU are forecast to decrease by 3 per cent, relative to 2012, to total 167 million tonnes. The decline can largely be attributed to import levels into the UK and Spain receding following a sharp upturn in 2012, compared with 2011. Imports into the EU in 2014 are forecast to remain steady at around 166 million tonnes.

Japan’s imports of thermal coal are forecast to decrease by 2 per cent in 2013 to total 130 million tonnes. Imports of thermal coal in 2012 were historically high due to the shut-down of most of Japan’s nuclear power plants following the 2011 Fukushima nuclear incident. In 2014, Japan’s imports of thermal coal are forecast to decrease slight and to total 129 million tonnes.

Exports

Growth in import demand for thermal coal in 2013 is forecast to be supported by higher exports from Australia, Indonesia and Colombia. In 2013, Australia’s exports of thermal coal are forecast to increase to 183 million tonnes, 7 per cent higher than in 2012. Higher exports are expected to supported by new production from several new projects and expansions across NSW and Queensland.

In 2014, Australia’s exports are forecast to increase by a further 7 per cent, relative to 2013, to total 196 million tonnes. This increase will be supported by production from soon-to-be-commissioned mines, such as Xstrata Itochu’s Ravensworth North expansion.

Thermal coal exports from Indonesia are forecast to increase by 6 per cent in 2013, compared with 2012, to total 335 million tonnes. In 2014, exports are forecast to increase by a further 3 per cent to total 345 million tonnes.

Cheap domestic gas in the US has continued to result in a substantial amount of coal being exported. In 2013, US thermal coal exports are forecast to increase by 10 per cent, relative to 2012, to total 55 million tonnes. In 2014, US exports are forecast to decrease and to total 51 million tonnes.

Australia’s thermal coal exports

Australia’s exports of thermal coal in 2012–13 are estimated to have totalled 182 million tonnes, an increase of 15 per cent relative to 2011–12. This increase is estimated to have been more than offset by lower export prices to result in export values decreasing to $16.2 billion. Exports are forecast to total 190 million tonnes in 2013–14, an increase of 5 per cent. Export values are forecast to increase by 8 per cent, relative to 2012–13, to total $17.5 billion, as a result of higher export volumes

18

and an assumed lower Australian dollar–US dollar exchange rate offsetting forecast lower prices in 2013–14.

Figure 2: Australia’s thermal coal exports


Table 1: Thermal coal outlook


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Resources outlook

Steel and steel-making raw materials

Tom Shael

Bulk commodity prices

Iron ore spot prices for 62 per cent iron ore content free on board (FOB) Australia averaged around US$141 a tonne in the first quarter of 2013. Spot prices reached a high of around US$152 a tonne in February but have since moderated to around US$115 a tonne in June 2013 in line with changing sentiment over China’s economic growth and steel output. For 2013 as a whole, contract prices for iron ore are forecast to average slightly above spot prices for the year, at around US$117 a tonne. Spot prices for 2014 are forecast to moderate due to increased seaborne supply and to average around US$112 a tonne.

Benchmark contract prices for high-quality hard coking coal delivered in the June quarter 2013 settled at US$172 a tonne, a substantial premium to the prevailing spot price at the time of negotiation. For 2013 as a whole, contract prices are forecast to average around US$162 a tonne due to continued weak spot prices. Average contract prices for 2014 are forecast to remain at around US$160 a tonne. Forecast growth in seaborne trade in 2014 is the main driver behind continued lower metallurgical coal prices.

Figure 1: Raw material contract prices, FOB Australia


World steel consumption

In 2013, world steel consumption is forecast to increase by 3 per cent, relative to 2012, to total 1.57 billion tonnes. In 2014, world steel consumption is forecast to increase by 4 per cent to total 1.62 billion tonnes (see Table 1). China’s steel consumption in 2013 is forecast to increase by 4 per cent, to total 697 million tonnes. The commencement of construction on Government-funded infrastructure projects is expected to support higher steel consumption demand in the second half of 2013 and into 2014. In 2014, China’s steel consumption is forecast to increase by a further 4 per cent to total 725 million tonnes.

Table 1: World steel consumption and production (Mt)2011 2012 2013 f 2014 f

Crude steel consumptionEuropean Union 27 169 166 165 166United States 96 98 98 100

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2011 2012 2013 f 2014 fBrazil 28 28 29 30Russian Federation 47 49 48 50China 650 669 697 725Japan 70 73 75 76Korea, Rep. of 59 59 61 64India 74 78 83 89World steel consumption 1485 1523 1567 1623Crude steel productionEuropean Union 27 176 167 165 167United States 86 89 89 90Brazil 35 35 35 37Russian Federation 69 71 70 72China 683 709 738 765Japan 108 107 109 110Korea, Rep. of 68 69 70 72India 72 77 82 88World steel production 1510 1534 1571 1620

Sources: BREE; World Steel Association.

World steel production

World steel production is forecast to increase by 2 per cent in 2013, compared with 2012, to total 1.57 billion tonnes. Further growth of 3 per cent to 1.62 billion tonnes is forecast for 2014.

China’s steel production from January to May 2013 was 324 million tonnes, which included a new monthly production record of 67.0 million tonnes for the 31 days of May. It is expected that the monthly rates of production will moderate as the year progresses, as has been the case in previous years. For 2013 as a whole, China’s steel production is forecast to increase by 4 per cent, relative to 2012, to total 738 million tonnes. Further growth of 4 per cent is forecast for 2014, raising total production to 765 million tonnes. The growth over the short term is in line with higher domestic consumption demand arising from infrastructure projects.

In the first 5 months of 2012, India’s steel production was 33 million tonnes, 5 per cent higher than produced in the corresponding period of 2012. In 2013, India’s steel production is forecast to increase by 7 per cent to total 82 million tonnes. Steel production is forecast to grow strongly again in 2014, increasing by 7 per cent to 88 million tonnes supported by assumed economic growth.

Figure 2: Quarterly world steel production


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World trade in iron ore

World trade in iron ore in 2013 is forecast to increase by 5 per cent, relative to 2012, to total 1.19 billion tonnes. World trade of iron ore in 2014 is forecast to increase by 7 per cent to 1.27 billion tonnes (see Table 2).

Iron ore imports

China’s imports of iron ore in 2013 are forecast to increase by 4 per cent, compared with 2012, to total 774 million tonnes. In 2013, imports are forecast to increase by a further 4 per cent to total 805 million tonnes. The slightly slower rate of growth compared with recent years is a result of a forecast moderation in steel demand and lower steel prices resulting in less efficient steel producers exiting the market.

Imports into the EU in 2013 and 2014 are forecast to increase slightly and to total 130 million tonnes in 2014. Imports into Japan and the Republic of Korea are expected to continue to increase in line with forecast modest growth in steel production in the short term.

Table 2: World iron ore trade (Mt)2011 2012 2013 f 2014 f

Iron ore importsEuropean Union 27 135 128 129 130Japan 128 131 132 134China 687 745 774 805Korea, Rep. of 65 66 66 68Iron ore exportsAustralia 438 494 571 664Brazil 331 327 336 370India 48 23 2 –13Canada 32 34 34 35South Africa 42 47 49 51West Africa (Guinea & Mauritania) 11 12 12 13World trade 1083 1127 1186 1271

Source: BREE.

Iron ore exports

In 2013, Brazil’s iron ore exports are forecast to increase by 3 per cent, relative to 2012, to total 336 million tonnes. In 2014, Brazil’s exports are forecast to increase by 10 per cent, compared with 2013, to total 370 million tonnes as expansions at Vale’s Carajás mine as well as mines in the Southern and South-eastern Systems commence production.

India’s iron ore exports are forecast to decrease substantially in 2013 and 2014 due to Government mandated mining bans in the key iron ore mining states of Odisha and Goa. India is forecast to be roughly (net) self-sufficient in 2013, before becoming a net importer of around 13 million tonnes in 2014.

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In 2013, Australia’s exports of iron ore are forecast to increase by 16 per cent, relative to 2012, to total 571 million tonnes. In 2014, Australia’s iron ore exports are forecast to increase by a further 16 per cent, to total 664 million tonnes. The increases will be supported by expansions to capacity at a number of projects owned by Australia’s larger operators, including Rio Tinto, BHP Billiton and Fortescue.

World trade in metallurgical coal

World trade of metallurgical coal is forecast to increase by 3 per cent in 2013, relative to 2012, to total 281 million tonnes. In 2014, world trade is forecast to increase by 7 per cent to 301 million tonnes supported by strong import growth in China (see Table 3).

Table 3: World metallurgical coal trade (Mt)2011 2012 2013 f 2014 f

Metallurgical coal importsEuropean Union 27 47 42 44 47Japan 54 53 53 54China 38 52 61 73Korea, Rep. of 32 33 33 34India 19 16 22 23Brazil 12 13 14 14Metallurgical coal exportsAustralia 133 145 153 168Canada 28 30 31 32United States 63 63 61 59Russian Federation 14 16 18 20World trade 253 271 281 301

Source: BREE.

Metallurgical coal imports

In 2013, China’s metallurgical coal imports are forecast to increase by 16 per cent to total 61 million tonnes. In 2014, China’s imports are forecast to increase by a further 21 per cent to total 73 million tonnes as continued low seaborne prices encourage the consumption of imported coals over those produced domestically.

Following a dip in imports in 2012, India is forecast to return to trend imports levels in 2013 and 2014. Imports are forecast to total 23 million tonnes in 2014. Imports into Japan are forecast to increase marginally over 2013 and 2014 to total 54 million tonnes in 2014. The Republic of Korea is forecast to increase imports of metallurgical coal in line with higher forecast steel production, to total 34 million tonnes in 2014. Imports into the EU are forecast to return to 2011 levels of around 47 million tonnes by 2014 as a result of lower local production.

Metallurgical coal exports

In 2013, Australia’s exports of metallurgical coal are forecast to increase by 6 per cent to 153 million tonnes. In 2014, exports are forecast to increase by a further 10

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per cent to total 168 million tonnes. Higher levels of exports are expected to be supported by production from a number of mines that are scheduled to start up in 2013, such as Anglo Coal’s Grosvenor underground mine and BHP Billiton Mitsubishi Alliance’s Daunia mine.

Australia’s bulk commodity exports

In 2012–13, Australia’s export volumes of iron ore are estimated to have increased by 13 per cent, relative to 2011–12, to total 533 million tonnes. Despite the substantial increase in export volumes, export values of iron ore in 2012–13 are estimated to have declined to $57.3 billion (see Figure 3). In 2013–14, a forecast increase of 15 per cent in export volumes and an assumed lower Australian dollar exchange rate are forecast to result in export values increasing by 17 per cent to $66.7 billion.

Figure 3: Australia’s iron ore exports


In 2012–13, the volume of Australia’s exports of metallurgical coal is estimated to have increased by 5 per cent to 150 million tonnes. Despite higher export volumes, earnings are estimated to have declined by 29 per cent to $21.7 billion as a result of lower contract and spot prices in 2012–13 (see Figure 4). Export volumes are forecast to increase by 7 per cent in 2013–14 to total 160 million tonnes, with export values increasing by 8 per cent to $23.5 billion.

Figure 4: Australia’s metallurgical coal exports


Table 4: Steel and steel-making raw materials outlook


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Gold

Adam Bialowas

Gold prices

The price of gold had its steepest fall in over 30 years when it plunged 12 per cent in a single week in mid-April 2013. This correction may be attributed to a change in investor sentiment towards gold in response to indications that the US Federal Reserve may end its quantitative easing program earlier than expected. This change in sentiment contributed to a capital outflow from gold into other asset classes. Further price falls were moderated by a surge in the demand for physical gold in the form of jewellery, coins and bullion.

Over 2013 as a whole, the price of gold is forecast to average around US$1444 per ounce, 13 per cent lower than in 2012, as outflows from Exchange Traded Funds, continue to weigh upon prices. The gold price is forecast to decrease by a further 7 per cent in 2014, to average around US$1340 an ounce, as the appeal of gold as an investment diminishes compared to other asset classes.

Figure 1: Quarterly gold price


Fabrication demand

Price sensitive consumers in the US, China and India responded to the April fall in the gold price with a surge in demand for gold jewellery, coins and medals. In the US, demand for coins was sufficient for the US Mint to suspend sales due to inventory depletion. In China and India, anecdotal evidence suggests that stocks at a large number of jewellery stores and gold traders were completely sold out. While the level of purchases in April are not expected to be maintained across 2013 as a whole, this buying activity should contribute to a 5 per cent increase in fabrication demand for gold, relative to 2012, to total 2747 tonnes. Fabrication demand for gold is expected to increase by a further 3 per cent in 2014, relative to 2013, to total 2835 tonnes. From 2014, initiatives by Indian authorities to curtail imports of gold are expected to affect growth in global fabrication demand due to India’s importance as the single largest source of fabrication demand for gold. These measures include further increases to the import duty on gold, restrictions upon how gold imports may be financed, and the issuing of investment bonds indexed to inflation to provide individuals an alternative means of preserving their wealth as a hedge against inflation.

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Official sector purchases

Since becoming net purchasers in 2010, central banks have proven to be largely unresponsive to the price of gold, with net purchases increasing in each year despite higher prices. This has been due to policies for diversification in a central banks’ foreign exchange portfolio, actions to protect a domestic currency or in response to legislative changes. In 2013, net gold purchases by the official sector are forecast to increase by 3 per cent relative to 2012 to total 550 tonnes, largely as a result of increased purchases amongst central banks of emerging economies. From 2014, central bank purchases of gold are expected to begin to decline as a more stable global economy encourages banks to purchases more traditional asset classes. Net gold purchases by the official sector are forecast to decrease 5 per cent in 2014, relative to 2013, to total 525 tonnes.

Gold mine production

In 2013 world gold mine production is expected to increase by 3 per cent, relative to 2012, to total 2747 tonnes. Increased production will be supported by a number of large operations commencing production such as Barrick Gold and Goldcorp’s joint venture Pueblo Veijo mine in the Dominican Republic (30 tonnes), Detour Gold’s Detour Lake operation in Canada (20 tonnes), Rio Tinto and Goldcorp’s Cerro Negro mine in Argentina (16 tonnes) and Turquoise Hill’s Oyu Tolgoi mine in Mongolia (13.5 tonnes).

The recent fall in the gold price is not expected to significantly affect production over the course of the year as the cost of production for the majority of global producers in 2012 was less than US$1000 an ounce. World gold mine production in 2014 is forecast to increase by 4 per cent, relative to 2013, to total 2835 tonnes. Additional production is expected from Randgold’s Kibali (17 tonnes) mine in the Democratic Republic of Congo, Goldcorp’s Cerro Negro (16 tonnes) mine in Argentina and Kinross’ Dvoinoye (7 tonnes) in the Russian Federation, as well as increased production from mines which commenced operations in 2013.

Scrap sales

In 2013, gold scrap sales are expected to decrease in response to lower prices. Gold sourced from secondary sources is forecast to decrease by 12 per cent relative to 2012, to total 1430 tonnes. In 2014 the quantity of gold sourced from scrap is forecast to decline by a further 8 per cent to total 1314 tonnes as widespread improvement in economic conditions reduce the incentives for holders of gold to sell their stocks.

Australia’s gold production and exports

Australian gold production is forecast to decrease by 1 per cent, relative to 2011–12, to total 252 tonnes in 2012–13. Over this period, production from new mines is expected to be more than offset by lost production from operations placed on ‘care and maintenance’, either due to mine exhaustion, Tanami Gold’s Coyote mine, BCD

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Resources’ Tasmania mine and StBarbara’s Southern Cross mine, or financial difficulty, Navigator Resources’ Bronzewing mine and Kentor Gold’s Murchison mine.

In the March quarter of 2013 there were a number of mines that reported production costs above the average gold price, however, these were due to increased costs associated with mine development or unforeseen operational issues. Lower gold prices in 2013–14, are expected to encourage mine operators to target higher grade ore bodies as part of measures to lower costs rather than result in mine closures. Australia’s gold mine production in 2013¬–14 is forecast to increase 5 per cent relative to 2012–13, to total 263 tonnes, mainly as a result of the start-up of the AngloGold Ashanti and Independence Group’s joint venture Tropicana mine (14 tonnes).

Australian exports of refined gold are produced from domestic ore, imports of gold dore (impure gold) and scrap. In 2012–13, expected lower imports of dore and scrap are forecast to result in an 8 per cent decrease in Australia’s export volumes relative to 2011–12 to total 281 tonnes. Combined with a lower price of gold in 2012–13, the value of gold exports is forecast to decrease by 3 per cent, relative to 2011–12, to total $14.9 billion. In 2013–14, an increase in Australian mine production is forecast to result in an 8 per cent increase in the volume of Australian gold exports relative to 2012–13, to total 304 tonnes. However, a forecast lower average price for gold is expected to result in the value of Australia’s gold exports in 2013–14 decreasing 6 per cent to total $14.1 billion.

Figure 2: Australian gold exports


Table 1: Gold outlook


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Aluminium

Simon Cowling

Prices

The average spot price for aluminium in the first quarter of 2013 remained at a similar level to December quarter 2012 at around US$2012 per tonne. To date in 2013 aluminium prices have peaked at around US$2109 a tonne in February 2013 and have since fallen 15 per cent to around US$1800 a tonne by mid-June 2013. For 2013 as a whole, the average spot price of aluminium is forecast to decrease 5 per cent, compared to 2012, to US$1912 a tonne (see Figure 1). Despite production curtailments aluminium stocks are forecast to remain high at around 9 weeks of consumption and place downward pressure on prices. In 2014, further production curtailments and forecast growth in demand are expected to result in lower stock levels. As a result, aluminium spot prices are projected to increase by around 1 per cent to US$1955 in 2014.

Figure 1: Annual aluminium prices and stocks


Consumption

World consumption in 2013 is forecast to increase to around 46 million tonnes, 2 per cent higher than 2012. China’s consumption is forecast to increase 4 per cent to total 21 million tonnes, underpinned by continued growth in the construction and manufacturing sectors in 2013. European aluminium consumption is forecast to decrease 4 per cent as a result of slow economic recovery with unemployment levels reducing demand for aluminium-intensive consumer products.

World aluminium consumption is forecast to increase to around 49 million tonnes in 2014, 6 per cent higher than 2013. China is forecast to increase consumption by around 8 per cent to total 23 million tonnes. Aluminium consumption in the Middle East is forecast to increase 7 per cent, relative to 2013, to total 2 million tonnes as a result of strong growth in construction activity.

Production

In 2013, global aluminium production is forecast to remain at similar levels to 2012 at around 46 million. Production in China is estimated to increase by around 3 per cent relative to 2013, to total 20.8 million tonnes. This is despite announced price-related production curtailments of around 1 million tonnes at existing refineries which are expected to be offset by new refineries coming online. In other countries a number of refinery operators are reviewing their operations with some already

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announcing curtailments and closures. In Canada Alcoa recently announced production cuts of 105 000 tonnes due to higher production costs while RUSAL has announced a 300 000 tonnes reduction in capacity at older smelters in western Russia as a result of increased operating costs and lower global prices. RUSAL has also announced further cuts are possible if market conditions continued to be challenging.

In 2014, world aluminium production is forecast to increase to around 48 million tonnes, 4 per cent higher than 2013. Growth in production will be underpinned by emerging economies, particularly the Middle East. These will offset further production decreases in OECD economies.

Australia’s production and exports

In 2012–13, production in Australia is forecast to decrease 7.7 per cent, relative to 2011–12, to total 1.8 million tonnes. Production is forecast to decrease by a further 2 per cent in 2013–14 to total 1.76 million tonnes. There is the risk of additional production curtailments in Australia through 2013–14 in response to lower prices.

Australia’s aluminium export volumes are forecast to decrease 7 per cent in 2012–13, compared to 2011–12, to total 1.57 million tonnes. Export earnings are forecast to decrease around 18 per cent to $3.2 billion (2012–13 dollars) as a result of lower prices and export volumes. In 2013–14, Australian aluminium export volumes are forecast to decrease to around 1.55 million tonnes (see Figure 2). The value of Australian aluminium exports is projected to decrease to $3.1 billion (in 2012–13 dollars) as a result of lower Australian export volumes.

Figure 2: Australia’s aluminium exports


Alumina

Prices

In 2013 alumina spot prices are forecast to increase to around US$329 a tonne, a 1 per cent increase compared to 2012. This forecast increase is the result of expected rises in energy costs around the world and increasing demand for aluminium. In 2014 the spot alumina price is forecast to increase by around 1 per cent to US$335 a tonne, again due to growing demand for aluminium in developing economies.

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Australia

Alumina production

In 2012–13, Australia’s alumina production is estimated to increase to around 21.9 million tonnes, an increase of 14 per cent, relative to 2011–12. Increases in capacity following technical and operational improvements at Rio Tinto Alcan’s Yarwun refinery and BHP Billiton’s Worsley refinery are expected to drive the increase. Production curtailments at refineries with higher operating costs are expected to partially offset these increases. Australia’s alumina production is forecast to rise by around 4 per cent in 2013–14 to total 22.7 million tonnes.

Alumina exports

Lower domestic aluminium production and higher alumina production are expected to result in higher exports of alumina from Australia. In 2012–13, alumina export volumes are forecast to increase 15 per cent, relative to 2011–12, to total 19 million tonnes. In 2013–14, alumina export volumes are projected to increase a further 1 per cent to around 19.3 million tonnes.

In 2012–13, the value of Australia’s alumina exports is forecast to increase 4 per cent to around $5.5 billion dollars relative to 2011–12, as a result of forecast higher export volumes and alumina prices (see Figure 3). Alumina export values in 2013–14 are forecast to increase around 20 per cent to $6.8 billion (in 2012–13 dollars). A forecast increase in the Australian alumina price, in part due to an assumed depreciation of the Australian dollar, is the principal cause of the increase in the value of alumina exports.

Bauxite exports

Australia’s bauxite export volumes are estimated to increase by around 7 per cent in 2012–13, to total 11.3 million tonnes, underpinned by higher global demand for raw processing ore. Export volumes are forecast to increase by a further 16 per cent to around 13.1 million tonnes in 2013–14. Australia’s bauxite export earnings are forecast to increase 6 per cent, relative to 2011–12, to total $323 million in 2012–13. The value of bauxite exports is forecast to increase by a further 14 per cent in 2013– 14 to total $367 million (in 2012–13 dollars). A forecast increase in bauxite prices is expected to underpin the increases in both years.

Figure 3: Australia’s alumina exports


Table 1: Aluminium and alumina outlook


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Copper

Weichen Yan

Prices

In the March quarter 2013, copper prices averaged US$7928 per tonne, virtually unchanged from the December quarter 2012 average price. Copper prices have since moderated in the June 2013 quarter in response to signs of slowing economic growth in the world’s principal copper consumer, China.

Despite recent production disruptions in the US and Indonesia, continued growth in supply is expected to result in higher copper stocks in 2013. Stocks are forecast to increase to 3.3 weeks of consumption in 2013. Copper prices are forecast to average around $US7294 a tonne in 2013, 8 per cent lower than the average price in 2012. Prices are forecast to decline further in 2014, by about 4 per cent, to around US$7 013 per tonne. Stock levels are forecast to increase further to 3.7 weeks of consumption in 2014 as a result of growth in copper production exceeding growth in consumption.

Figure 1: Annual Prices and Stocks


Consumption

World copper consumption in 2013 is forecast to increase 1 per cent, relative to 2012, and to total 20.6 million tonnes as a result of continued growth in emerging economies, particularly China. In 2014, world copper consumption is projected to be around 21.2 million tonnes, an increase of 2.6 per cent compared to 2013. Emerging economies are expected to remain the principal sources of growth in consumption, but as general economic conditions improve around the world, moderate rises in consumption in some OECD countries are also expected to contribute to the increase in 2014 world consumption.

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Mine production

In 2013 global copper mine production is projected to increase 3.6 per cent, relative to 2012, to 17.7 million tonnes. This lower growth rate is mainly due to production disruptions at Freeport McMoRan’s Grasberg mine in Indonesia and Rio Tinto’s Bingham Canyon copper mine in the United States. These disruptions are expected to partially offset production coming from new large copper mines starting up in 2013 such as the Oyu Tolgoi mine (400 000 tonnes) in Mongolia, the Konkola mine (380 000 tonnes) in Zambia and the Antapaccay mine (160 000) in Peru.

In 2014 world copper mine production is forecast to be around 18.4 million tonnes, a 4.1 per cent increase compared to 2013. This is underpinned by recently opened mines ramping up to full production capacity and the expected return to normal operations at mines that have experienced production disruptions in 2013. However, the potential for further protests against mines in Latin America due to labour disputes and environmental concerns remain a source of risk to this volume growth.

Refined production

Refined copper production in the world in 2013 is forecast to increase 2.2 per cent, relative to 2012, to 20.9 million tonnes, driven primarily by production in China. Expected start-ups of refineries in Africa and Mexico are also expected to further boost supply in the short-term. In 2014, world refined copper production is forecast to increase by a further 2.2 per cent and to total 21.3 million tonnes. Much of the growth is again expected to come from Chinese copper refineries.

Australia

Production

Australian copper mine production in 2012–13 is projected to rise 6 per cent, compared to 2011–12, to total 979 000 tonnes. The main contributor to this growth is Sandfire Resources’ DeGrussa mine in Western Australia ramping up to full capacity in 2013.

In 2013–14, copper mine production in Australia is forecast to total 1.1 million tonnes. This 11 per cent rise, relative to 2012–13, is due to higher production from a number of mines across the country, including MMG Limited’s Golden Grove mine, Sandfire Resources’ DeGrussa mine, Xstrata’s Ernst Henry underground expansion and Newcrest’s Cadia Valley mine.

Production of refined copper in Australia in 2012–13 is forecast to be around 456 000 tonnes, a 6 per cent decrease relative to 2011–12, due mainly to disruptions at the Olympic Dam and Port Pirie refineries. Australian refined copper production is projected to pick up in 2013–14, rising 10 per cent relative to 2012–13 to 503 000 tonnes.

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Exports

The volume of Australian copper exports (in metallic content) is forecast to total 964 000 tonnes in 2012–13, a 4 per cent increase relative to 2011–12. Contributing to the rise is higher exports of copper ores and concentrates, whilst exports of refined copper are forecast to fall. Despite the forecast rise in export volumes, Australia’s copper export earnings in 2012–13 are forecast to decrease 6 per cent to total $8.0 billion, due to lower copper prices.

In 2013–14, the volume of Australian copper exports (in metallic content) is forecast to increase 6 per cent to around 1 million tonnes. The forecast growth in copper export volumes and an assumed lower value of the Australian dollar are expected to result in copper export values increasing 13 per cent to total $8.8 billion.

Figure 2: Australia’s copper exports


Table 1: Copper outlook


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Nickel

Simon Cowling

Prices

Nickel spot prices averaged US$17 314 a tonne in the March quarter of 2013, 2 per cent higher than the previous quarter. In 2013, nickel prices peaked in February at around US$18 600 a tonne and have since declined to below US$14 000 a tonne by mid-June in response to lower demand growth for refined nickel in key Asia-Pacific markets. For the remainder of 2013 high stock levels are expected to limit the prospects of higher nickel prices which are forecast to average around US$15 400 for the year as a whole, 12 per cent lower than 2012 (see Figure 1).

Nickel prices are forecast to increase in 2014 to average around US$15 900 in response to expected production curtailments and continued consumption growth from key Asia-Pacific markets.

Figure 1: Annual nickel prices and stocks


Consumption

In 2013, world nickel consumption is forecast to increase 3 per cent, relative to 2012, to total 1.7 million tonnes. Consumption in China is forecast to increase by 7 per cent, relative to 2012, to total 825 000 tonnes as a result of higher building and construction sector activity consuming more stainless steel. This is expected to be partially offset by lower consumption in the European Union which is forecast to decrease 3 per cent, relative to 2012, to total 323 000 tonnes in 2013.

World nickel consumption is forecast to increase to around 1.77 million tonnes in 2014, an increase of 3 per cent relative to 2013. Growth in nickel demand will be underpinned by increased steel demand from emerging Asian economies. China is again expected to be the main source of growth in nickel consumption with its demand forecast to increase by 4 per cent, relative to 2013, to total 860 000 tonnes. India’s nickel demand is forecast to increase to 55 000 tonnes, up 8 per cent relative to 2012.

Mine production

Mined nickel production is forecast to decrease 2 per cent in 2013, relative to 2012, to around 2.1 million tonnes in 2013. Indonesia’s nickel production in 2013 is expected to decrease from 460 000 tonnes in 2012 to 390 000 tonnes. Implementation of government-imposed taxes on raw minerals exports before 2014

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will underpin the decrease. The Russian Federation is forecast to decrease production by around 6 per cent to 255 000 tonnes in 2013 due to rising production costs. In 2014, world nickel production is forecast to rebound to around 2.2 million tonnes, supported by recently started mines in New Caledonia (Xstrata’s Koniambo mine) and Finland (First Quantum Minerals’ Kevista mine) ramping up towards full production.

Refined production

World production of refined nickel is forecast to remain steady at around 1.7 million tonnes in 2013. Production in China is forecast to increase, relative to 2012, by 4 per cent to total 540 000 tonnes due to continued growth in its consumption of stainless steel. In Canada refined nickel production is forecast to decrease by 11 per cent, relative to 2012, to total 124 000 tonnes as nickel companies shift production to cheaper projects and close higher cost operations.

In 2014 world refined nickel production is forecast to increase 2 per cent to total 1.8 million tonnes. This forecast increase is expected to be underpinned by a production ramp up at the Skerritt International’s joint venture Ambatovy refinery (60 000 tonnes) in Madagascar and restart in December quarter 2013 of the Vale Onça Puma refinery in Brazil.

Australia

Mine production

Australia’s nickel mine production 2012–13 is forecast to remain stable, relative to 2011–12, at 235 000 tonnes. This forecast decrease is the result of the closure of Norilsk’s Lake Johnston mine in April 2013 and Xstrata Nickel Australia’s Sinclair mine reaching the end of its production life in May 2013. These closures will also result in lower production in 2013–14 when a full year of production is taken offline. Nickel production is forecast to decrease a further 11 per cent in 2013–14 to total 208 000 tonnes. Further risk of closures and production curtailments remain if current low prices prevail through the rest of 2013.

Refined production

During 2012–13 refined production is forecast to increase to around 128 000 tonnes, 5 per cent higher than 2011–12. Increased production efficiencies from Minara Resources’ Murrin Murrin refinery in Western Australia following operational upgrades are expected to underpin the rise. In 2013 –14, refined nickel production is estimated to decrease by 5 per cent, relative to 2012–13, to total 121 000 tonnes. The forecast decrease is a result of curtailments in production due to low nickel prices and higher energy, labour and operating costs.

Exports

In 2012–13, Australia’s nickel exports are estimated to have increased 3 per cent, relative to 2011–12, to total 247 000 tonnes, underpinned by increased production

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of higher value refined nickel (see Figure 2). In 2013–14 export volumes are forecast to decrease by around 1 per cent to total 245 000 tonnes as a result of forecast lower refined nickel production. Export earnings are forecast to decrease 15 per cent to total slightly under $3.5 billion in 2012–13 due to a lower Australian dollar nickel price. The value of nickel exports is forecast to increase by 2 per cent in 2013–14 to total just over $3.5 billion as nickel a result of higher nickel prices and an assumed depreciation in the Australian dollar.

Figure 2: Australian nickel exports


Table 1: Nickel outlook


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Zinc

Adam Bialowas

Zinc prices and stocks

In the March quarter of 2013 the price of zinc averaged US$2033 a tonne, 4 per cent higher than in the December 2012 quarter. Prices peaked in mid-February 2013 before subsequently declining 16 per cent, to be US$1882 by the end of May. In 2013, rising zinc stocks are expected to result in a decrease in the zinc price of 1 per cent, relative to 2012, to average around US$1930 a tonne.

Zinc prices are forecast to increase in 2014 in anticipation of an expected tightening of the zinc market from 2015. The price of zinc in 2014 is expected to increase by 5 per cent, relative to 2013, to around US$2025 a tonne.

Figure 1: Annual zinc prices and stocks


World refined consumption

In 2013, world zinc consumption is forecast to increase by 5 per cent, relative to 2012, to total 12.9 million tonnes. This increase is the result of developments within China, the world’s largest zinc consumer. In the second half of 2012, Chinese officials approved a number of infrastructure projects which are forecast to contribute to a 7 per cent increase in Chinese zinc demand in 2013, relative to 2012, to total 5.6 million tonnes.

World zinc consumption in 2014 is forecast to increase by 4 per cent, relative to 2013, to total 13.5 million tonnes. Emerging economies will remain the primary source of growth in zinc consumption in 2014, supported increased consumption by some developed economies. Chinese zinc consumption is forecast to increase by 6 per cent relative to 2013 to total 6 million tonnes while Indian consumption is forecast to increase by 7 per cent to total 667 000 tonnes. In the US, improving economic conditions are expected to lead to an increase in housing construction and purchases of automobiles, both of which are zinc intensive. Zinc consumption in the US is forecast to increase by 4 per cent in 2014, relative to 2013, to total 948 000 tonnes.

World zinc mine production

World mine production in 2013 is forecast to increase by 2 per cent, relative to 2012, to total 13.9 million tonnes. This increase will be supported by output from new mines and also higher production from mines commissioned in 2012. This higher

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output will be partially offset by the closure of Glencore Xstrata’s Brunswick (240 000 tonnes) and Perseverance (115 000) mines in Canada.

Global zinc mine production in 2014 is forecast to increase by 3 per cent, relative to 2013, to total 14.3 million tonnes. Glencore Xstrata’s expansion to its McArthur River mine (200 000 tonnes) in Australia and Bumi Resources Minerals’ Dairi (160 000 tonnes) in Indonesia will be the largest operations to commence in 2014. Partially offsetting these increases in production are the expected closure of Vedanta Resources’ Lisheen mine (170 000 tonnes) in Ireland and lower production from MMG’s Century mine in Australia.

Refined zinc production

Refined zinc production is forecast to increase 5 per cent in 2013, relative to 2012, to total 13.3 million tonnes. The majority of this increase is expected to come from China where increased smelter utilisation rates and additional capacity from new facilities are forecast to result in a 10 per cent increase in production to total 5.3 million tonnes. Outside of China, refined zinc production in 2013 will be supported by the re-opening of Glencore Xstrata’s Portovesme zinc smelter (40 000 tonnes) in Italy and Doe Run Peru’s La Oroya (80 000 tonnes) smelter in Peru. In 2014, refined zinc production is expected to increase a further 4 per cent relative to 2013 to total 13.8 million tonnes, primarily due to the starting of new smelters in China.

Australian zinc production and exports

In 2012–13, Australia’s zinc mine production is forecast to decrease by 4 per cent relative to 2011–12, to total 1.5 million tonnes. Lower production is expected due to the closure of Bass Metals’ Hellyer mine, and reductions in output at MMG’s Golden Grove and Century mines. These reductions are expected to more than offset new production from CBH Resources’ Rasp mine (34 000 tonnes) as well as Glencore Xstrata’s Lady Loretta (126 000 tonnes) and George Fisher mines (64 000 tonnes). Production of refined zinc for 2012–13 is forecast to total 493 000 tonnes, 2 per cent lower than 2011–12, due to unscheduled outages at Nyrstar’s Port Pirie smelter.

Australia’s zinc mine production in 2013–14 is forecast to increase by 12 per cent, relative to 2012–13, to total 1.7 million tonnes. New production is expected to come from the expansion of Glencore Xstrata’s McArthur River operation (200 000 tonnes) and increased production at Glencore Xstrata’s Lady Loretta and George Fisher mines as they ramp up to full capacity. Australia’s production of refined zinc is forecast to increase by 1 per cent in 2013–14, relative to 2012–13 to total 499 000 tonnes.

In 2012–13, the volume of Australia’s zinc exports is forecast to decline 7 per cent compared with 2011–12, to total 1.5 million tonnes as the result of lower domestic production. Combined with a lower Australian zinc price, Australian export earnings in 2012–13 are forecast to decline by 15 per cent, relative to 2011–12, to total $2 billion. Increased mine production in 2013–14 is expected to underpin a 12 per cent increase in zinc export volumes, relative to 2012–13, to total 1.6 million tonnes. In

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2013–14, a forecast higher zinc price and an assumed depreciation in the Australian dollar is expected to result in the value of Australia’s zinc exports increasing 23 per cent, relative to 2012–13, to total $2.5 billion.

Figure 2: Australia’s zinc exports


Table 1: Zinc outlook


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Resourcesand Energy

QuarterlyReviews

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The value of Australia’s mineral and energy resources

Allison Ball

Australia has a large inventory of resources of most of the world’s key mineral and energy commodities, a product of Australia’s long and complex geological history. These resources are an important component of Australia’s wealth. Along with contribution to economic output, employment and exports, another measure of mineral wealth is the monetary value of the in-ground resources. The Australian Bureau of Statistics (ABS) publishes annual estimates of the value of Australia’s economic demonstrated resources.

This review uses the ABS estimates to explore the value of Australia’s mineral and energy resources, including the relative contribution of different commodities, and how the value has changed over time. It also evaluates how the value of Australia’s mineral and energy resources compares internationally, using recent World Bank estimates.

Australia’s economic demonstrated resources

The national system for classification of Australia’s identified mineral resources is illustrated in Figure 1. It classifies identified mineral resources according to two parameters: the degree of geological assurance and the degree of economic feasibility of exploitation. The former takes account of information on quantity and grade, while the latter takes account of economic factors such as commodity prices, operating costs, capital costs and discount rates.

Figure 1: Australia’s national classification system for mineral resources


Economic demonstrated resources (EDR) are the quantity of resources judged to be economically extractable under current market conditions and technologies. Geoscience Australia publishes estimates of EDR each year in Australia’s Identified Mineral Resources and Oil and Gas Resources of Australia (Geoscience Australia 2013, 2012). These publications form the basis of the ABS estimates of the value of Australia’s mineral and energy resources.

Table 1 shows the latest EDR estimates by Geoscience Australia for the mineral and energy resources included in the ABS value estimates. In volume terms, Australia’s

The views expressed in this review are those of the author alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism. Comments and advice of Quentin Grafton of BREE and Marita Bradshaw of Geoscience Australia are gratefully acknowledged.

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EDR are dominated by black coal, brown coal and iron ore, followed by bauxite and natural gas (Figure 2). Black coal and iron ore EDR have increased substantially in recent years as a result of both new discoveries and the upgrading of some resources into the category of economic because of relatively higher prices.

Table 1: Economic demonstrated resources, Australia, December 2011 Resource Unit EDR Resource Unit EDRAntimony kt 106 Mineral sands – Rutile Mt 27.2

Bauxite Mt 5 665 Mineral sands – Zircon Mt 46.6

Black coal Mt 57 538 Natural gas a b bcm 2 918

Brown coal Mt 44 219 Nickel Mt 20.4

Cobalt kt 1 204 Petroleum – Crude oil b GL 154

Copper Mt 86.7 Petroleum – Condensate b GL 335

Diamond Mc 272.5 Petroleum – Naturally occurring LPG b GL 153

Gold kt 9.2 Platinum group t 4.7

Iron ore Mt 37 762 Rare earths Mt 2.1

Lead Mt 35.9 Silver kt 87.9

Lithium kt 1 006 Tin kt 243

Magnesite Mt 330 Uranium kt 1 196

Mineral sands – Ilmenite Mt 188.9 Zinc Mt 68.3

Notes: a Does not include coal seam gas, which has an EDR of around 924 bcm. b As at 1 January 2011.Sources: Geoscience Australia 2013, 2012

Figure 2: Economic demonstrated resources, Australia


Australia has the world’s largest economic resources of gold, iron ore, lead, nickel, rutile, uranium, zinc and zircon. The country also ranks among the top six worldwide for resources of antimony, bauxite, black coal, brown coal, cobalt, copper, diamond, ilmenite, lithium, manganese, niobium, silver, tantalum, tungsten and vanadium (Geoscience Australia 2013).

The role of the resources sector in the economy

Exploration, extraction and processing of mineral and energy resources make a significant contribution to the Australian economy. In 2011–12, industry gross value added for the mining and mineral processing sectors was $184 billion (using chain volume measures), equal to 12.6 per cent of GDP (table 2). These sectors directly employed 521 000 people, equal to 4.6 per cent of total employment in that year. Exports of mineral and energy commodities were valued at $187.1 billion in 2011–12 (using chain volume measures), around 60 per cent of the Australian total exports by value (BREE 2012).

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Table 2: Economic contribution of resources sector in AustraliaUnit 1991–92 2001–02 2011–12

Industry gross value added a – Resources b $m 106 369 144 652 183 629

– Total GDP $m 731 216 1 073 596 1 451 679

– Share % 14.5 13.5 12.6

Employment

– Resources b 000 417 385 521

– Total 000 7 623 9 140 11 413

– Share % 5.5 4.2 4.6

Value of exports a – Minerals and energy $m 56 362 116 423 187 117

– Total $m 126 894 238 919 311 291

– Share % 44.4 48.7 60.1

Notes: a Chain volume measures, reference year is 2009–10. b Includes mining, and manufacturing (petroleum, coal, chemical products, non-metallic mineral products, and metal products) Source: BREE 2013; BREE database.

Total industry gross value added and employment in the resources sectors have increased over the past decade as part of the current resources boom, although its share of GDP has fallen slightly over this period. The value of minerals and energy exports has also increased significantly over the past decade, as has their contribution to total exports.

Estimating the value of Australia’s mineral and energy resources

It is possible to measure the economic value of the mineral and energy resources still in the ground. The ABS currently publishes an estimate of the value of Australia’s economic demonstrated resources by commodity each year, in the series: 5204.0 Australian System of National Accounts, Table 62. Value of Demonstrated Subsoil Assets, by Commodity – as at 30 June (ABS 2012a).

Subsoil assets are defined in the Australian System of National Accounts (ASNA) to consist of “subsoil resources of coal, oil and natural gas, metallic minerals or non-metallic minerals that are economically exploitable given current technology and relative prices”. The ASNA treatment of subsoil assets is the same as that used by Geoscience Australia for EDR (ABS 2012b).

The ABS uses a net present value (NPV) approach, which involves calculating the expected future net income flow generated by the asset, then discounting this value by an appropriate interest rate over the expected life of the asset. This involves estimating the value of net income; gross output (price multiplied by production) less costs (including a normal return on produced capital) over a year. This difference is taken to be the equivalent of economic rent. The future income flow is calculated

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for each year and is discounted over the expected mine life to obtain a value in today’s dollars. Normal returns to produced capital are excluded, as economic rent represents the returns from the resource only (and no returns on produced capital used to extract the resource) (ABS 2012b).

The NPV approach is the most widely used approach by countries in valuing subsoil assets (World Bank 2011), and is the one recommended by the United Nations System of Integrated Environmental and Economic Accounting.

Current value of Australia’s mineral and energy resources

Based on the ABS estimates, Australia’s economic demonstrated resources were valued at nearly $863 billion (in current prices) as at the end of June 2012 (Table 3). This is equivalent to around 60 per cent of Australia’s GDP in 2011–12.

Table 3: Net present value of Australia’s economic demonstrated resources, 30 June 2011

$b %Bauxite 0.2 0.0

Black coal 127.0 14.7

Brown coal 0.3 0.0

Copper, gold, antimony 125.2 14.5

Crude oil 69.9 8.1

Condensate 71.5 8.3

LPG 43.0 5.0

Iron ore 238.2 27.6

Mineral sands (ilmenite, rutile, zircon) 14.5 1.7

Natural gas 155.5 18.0

Nickel, platinum, cobalt 2.2 0.3

Uranium 0.3 0.0

Zinc, lead, silver, cadmium 10.2 1.2

Other 4.6 0.5

Total 862.7 100.0

Note: Minerals that are often mined together are aggregated by the ABS for publication because it is difficult to obtain individual commodity extraction costs. a Does not include coal seam gas.Source: ABS 2012a.

Iron ore resources have the highest value and account for 28 per cent of the total value. Natural gas account for 18 per cent of the total value. The ABS estimates do not include coal seam gas, which has an EDR of around one-third that of conventional gas, and would significantly increase the estimated value for Australia’s gas resources, if included. Crude oil, condensate and naturally occurring LPG comprise 21 per cent of the total value of Australian EDR. Black coal account for 15 per cent of the total value, as do copper, gold and antimony (15 per cent). Energy resources (coal, liquid petroleum, natural gas and uranium) account for 54 per cent of the total value, or around $468 billion.

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Apart from iron ore, the relative contribution of various commodities to the total value of resources varies considerably from the volumetric shares (Figure 3). Copper, gold, liquid petroleum and natural gas contribute significantly more to the value of Australia’s resources than to the volume. In contrast, bauxite and coal have a much higher share of volume of resources than value.

Figure 3: Share of Australia’s economic demonstrated resources, by value and volume


Trends in the value of Australia’s mineral and energy resources

The real total value of Australia’s mineral and energy resources (EDR) tripled over the past decade. The total value rose by $645 billion (in 2011–12 dollars) between end June 2002 and end June 2012, equal to average annual growth of 15 per cent (Figure 4). The greatest increase in value occurred in iron ore ($231 billion over the same period, average annual growth of 43 per cent a year), followed by coal ($126 billion, average annual growth of 57 per cent a year). Significant increases in value over the past decade also occurred in copper and gold ($100 billion in total, average annual growth of 17 per cent a year), natural gas ($95 billion, average annual growth of 10 per cent a year) and liquid petroleum ($92 billion, average annual growth of 7 per cent a year).

Figure 4: Net present value of Australia’s economic demonstrated resources, by commodity


Energy resources (coal, liquid petroleum, natural gas and uranium) have more than doubled in value in real terms over the past decade. The rate of increase has been slower than that of metallic and non-metallic minerals, which have increased more than fivefold in value over the same period. As a result, the share of energy resources in total value has declined significantly, from around a peak of 76 per cent at end June 2004, to 54 per cent at end June 2012 (Figure 5). This reflects the recent decline in the value of coal resources and strong growth in the value of iron ore, copper and gold resources.

Figure 5: Net present value of Australia’s economic demonstrated resources, by type of commodity


Key factors contributing to the growth in total value include higher commodity prices and an expansion in the volume of EDR for most resources. Prices also play a role in

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determining EDR – as prices rise, the volume of resources classed as economic increases, assuming no change in costs of extraction.

Figure 6 shows the rise in real prices in recent years for the main mineral and energy commodities for Australia. The prices are based on the series used by the ABS in their value calculations, which is a five-year lagged moving average of nominal prices. The prices have been converted to 2011–12 dollars and then indexed to enable a comparison across different commodities. The use of the five-year average by the ABS results in a smoother price series and should only be used as a guide to price trends over this period.

Figure 6: Real prices of key Australian mineral and energy commodities


Real prices for all key commodities were higher in recent years compared with the past two decades, driven largely by increased demand from China. In particular, crude oil, iron ore, copper, black coal and natural gas prices have increased significantly since the early 2000s. Further details can be found on trends in commodity prices and the drivers of the current resources boom in Grafton (2012). These higher prices have been a key driver in the overall increase in the value of Australia’s mineral and energy resources.

Figure 7 is an index of EDR for Australia’s main mineral and energy resources, as used by the ABS in their value estimates. Higher prices can contribute to growth in EDR, as can new discoveries.

Iron ore resources have increased significantly in recent years, with large increases in the volume of magnetite (including upgrading of resources into economic) and hematite resources, as well as higher prices (Geoscience Australia 2013). This increase in iron ore EDR and prices has been one of the main drivers of the overall increase in the value of Australia’s resources – the share of iron ore in total value has increased from 3 per cent at end June 2002 to 28 per cent at end June 2012.

Figure 7: Economic demonstrated resources, Australia


Copper resources have increased sharply, primarily due to an increase in company announced resources for Olympic Dam and reclassification of some resources into economic (Geoscience Australia 2013).

After falling in the late 1990s and early 2000s because of increased production and mining companies re-estimating resources more conservatively, recoverable black coal resources increased last year with higher levels of exploration and prices (Geoscience Australia 2013). Natural gas resources have been increasing over the

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past two decades with increased exploration activity and relatively high international gas prices. By contrast, liquid petroleum resources have generally been falling (apart from condensate), with less than ten years of crude oil remaining at current rates of production (Geoscience Australia 2012).

Another key factor affecting the value of resources is the cost of extraction – assuming prices and production are held constant, economic rents and value will fall if production costs rise. The ABS no longer publishes the individual commodity extraction costs used in their calculations, because of the commercial sensitivity of the data. While updated extraction costs were used for the latest ABS value calculations, the costs from the 2011 ABS estimates show an increase in costs in recent years (Figure 8). It is likely that production costs continued to rise in 2012. Production costs have risen for a range of reasons, included higher labour, equipment and energy costs.

The rising costs of production in recent years have dampened the effects of higher prices and higher resource volumes on the growth in the value of Australia’s resources. In the case of black coal, the fall in the value of resources in the past two years, evident in Figure 4, is the result of increasing extraction costs, which offsets the positive contribution of higher prices and growth in EDR.

Figure 8: Costs of extraction, including normal return on capital, real prices


International comparisons

Australia has the world’s largest economic resources of gold, iron ore, lead, nickel, uranium and zinc, and ranks among the top six for bauxite, black and brown coal, copper, diamond and silver (Geoscience Australia 2013). By contrast, Australia’s oil and natural gas resources are relatively small compared with large oil and gas producing countries.

In 2011, the World Bank published a study measuring the value of mineral and energy resources across more than 120 countries (World Bank 2011). As part of this study, it assigned dollar values to the stocks of the main energy resources (oil, gas, and coal) and to the stocks of ten metals and other minerals (bauxite, copper, gold, iron ore, lead, nickel, phosphate rock, silver, tin, and zinc) for all countries that have production data. Similar to the ABS and many other studies, the World Bank used a net present value method to produce its wealth estimates.

Table 4 shows the World Bank estimates of resource wealth and its share of total national wealth for 2005 (the latest year estimated), for the twenty countries with the highest value. Australia is ranked 13th in the world in terms of the value of mineral and energy resources, behind the Russian Federation, Saudi Arabia, China and the United States. This is equivalent to around 2.4 per cent of the estimated world value. On a per capita resource wealth basis, Australia’s ranking increases

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slightly to 12th in the world. These comparisons should be used as a guide only, as the World Bank makes a number of generic assumptions about the life of resources, prices and costs.

Table 4: Value of mineral and energy resources, Top 20 countries, 2005

Total value2005 US$ million

Value per capita 2005 US$

Share of total national wealth%

Russian Federation 3468789 24238 33.1

Saudi Arabia 2002567 86620 59.3

China 1048818 804 4.2

United States 1030915 3478 0.5

Iran 954628 13987 41.8

Venezuela 640240 24090 34.5

Nigeria 556943 3940 35.9

Kuwait 537548 212013 65.0

United Arab Emirates 535414 118111 33.8

Norway 460971 99706 11.6

Algeria 436726 13293 43.9

Brazil 432646 2321 2.9

Australia 413248 20328 3.9

Canada 408389 12644 2.3

India 386483 353 3.3

Mexico 363389 3525 2.7

Indonesia 324882 1473 7.5

Malaysia 256059 10102 15.6

Ukraine 185799 3085 0.5

Oman 183875 71631 48.5

World 17030624 2779 2.4

Source: World Bank 2011

The World Bank also estimated the contribution of mineral and energy resources to total national wealth. For Australia, these resources accounted for 4 per cent of its total national wealth in 2005. This share is slightly above the world average of 2 per cent, and similar to that of China (4 per cent), India (3 per cent) and South Africa (3 per cent) (World Bank 2011).

Like Australia, many other countries have also experienced an increase in the value of their mineral and energy resources in recent years. Statistics Canada publishes a similar series on the value of Canada’s resources, also using a net present value methodology. In real terms, the value of Canada’s mineral and energy resources have increased by 10 per cent a year over the period 2001 to 2011, or around CAN$761 billion in total (2011 dollars) (equal to around A$740 billion). This compares with an increase of 14 per cent a year over the same period for Australia, or around A$537 billion (Figure 9). Higher global energy prices as well as a significant increase in oil sands reserves have been the main source of Canada’s increased mineral wealth over the past decade (Islam and Adams 2010).

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Figure 9: Value of mineral and energy resources, Australia and Canada


Limitations of the methodology

While the net present value method of valuing resources is widely used, it does have some limitations. One of its weaknesses is that it assumes all resources of a particular commodity are homogenous and can be extracted using the same technology, at the same cost and the same rate over time. In reality, the lowest cost and highest value resources are typically extracted first. Moreover, the rate of extraction often declines as an ore body or field becomes more depleted.

Technology breakthroughs may reduce the cost of extraction over time and demands for certain products, as well as affecting future price paths. This can be difficult to predict and is often not captured in the assumptions used to derive wealth estimates. For example, Australia potentially has the world’s largest identified thorium resources. Currently, there is no large scale demand for thorium and these resources are not included in the ABS estimates of the value of Australia’s mineral resources. Several nuclear reactor concepts based on thorium fuel cycles (instead of uranium) are under consideration, but a significant amount of development work is required before it can be commercialised.

Conclusions

Australia has large resources of many mineral and energy commodities, including world class resources of key commodities such as black coal and iron ore. The resources sector currently makes a significant contribution to the Australian economy. Using a net present value method, the monetary value of Australia’s mineral and energy resources in the ground can also be estimated. The latest estimates of the value of Australia’s economic demonstrated resources are in the order of $863 billion, equivalent to around 60 per cent of Australia’s GDP. This value has tripled in real terms over the past decade, driven by higher commodity prices and an increase in resource volumes.

References

ABS 2012a, 5204.0 Australian System of National Accounts, Table 62. Value of Demonstrated Subsoil Assets, by Commodity – as at 30 June, Canberra, November.

ABS 2012b, 5216.0 Australian System of National Accounts: Concepts, Sources and Methods, Edition 1 2012, Canberra, July.

ABS 2011, 5204.0 Australian System of National Accounts, Table 62. Value of Demonstrated Subsoil Assets, by Commodity – as at 30 June, Canberra, November.

BREE 2013, Resources and Energy Quarterly, March Quarter 2013, Canberra, March.

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Geoscience Australia 2013, Australia’s Identified Mineral Resources 2012, Canberra, April.

Geoscience Australia 2012, Oil and Gas Resources of Australia – 2010, Canberra, March.

Grafton, Q. 2012, ‘The importance, drivers and phases of the Millennium Mining Boom’, Resources and Energy Quarterly, September Quarter 2012, BREE, Canberra, September.

International Monetary Fund (IMF) 2012, World Economic Outlook Database, October 2012, Washington DC.

Islam, K. and Adams, P. 2010, ‘Natural resource wealth 1990 to 2009’, EnviroStats, Summer 2010, Statistics Canada.

Statistics Canada 2012, Table 378–0005 Natural resource assets and produced assets, annual (dollars), CANSIM database.

World Bank 2011, The changing wealth of nations: measuring sustainable development in the new millennium, Washington DC.

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Australian mining productivity

Arif Syed

The purpose of this review is to highlight the salient feature of Australian mining productivity with special emphasis on mining productivity measurement issues; productivity estimates at the national, state and sectoral levels; and the nature of technology change and input use prevailing in Australian mining.

Productivity represents the relationship between output and the inputs used to generate that output. Simply put, productivity growth indicates that more output is being produced for a given level of inputs. The partial or single factor productivity of an input is given by the average ratio of output per unit of input. Multifactor productivity (MFP) is measured in terms of real output per unit of labour and capital.

Productivity growth is an important issue for Australia. Since the 1990s there appears to have been a productivity slowdown in most sectors. Using unadjusted numbers, the biggest decline in productivity in any sector over the past decade has been in mining which has experienced negative rates of productivity growth.

Using Australian Bureau of Statistics (ABS) data, unadjusted multifactor productivity (MFP) in the mining sector declined by about one third between 2000–01 and 2009–10. The most recent ABS data shows that Australian mining sector unadjusted MFP declined annually by 7.4, 8.7, 1.7, and 12.2 per cent over the four years from 2007–08 to 2010–11 (ABS 2011). Despite a decline in unadjusted productivity, revenue and profit growth in the mining sector over this period was sustained by a substantial, general rise in commodity prices.

Australian mining industry

Mining is important to Australian economy. In 2011–12, investment in new capital expenditure in the mining sector represented 53 per cent of private new capital expenditure and was valued at $82 billion. From 1990 to 2012, mining industry output surged in current price terms (9.7 per cent a year), but its growth in volume or real output terms was relatively modest (3.5 per cent a year). Average direct employment in mining rose from 173,000 persons in 2009–10 to 248,000 in 2011–12.

The views expressed in this review are those of the author alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.This review summarises key findings in the BREE Discussion Paper, Productivity in the Australian Mining Sector by Syed A., Grafton Q., and Kalirajan K. (2013).

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Mining output over the past decade did not grow at the same rate of investment or in the same proportion to the rise in global commodity prices. As a result, although Australia experienced a mining ‘boom’ (Grafton 2012) that led to an unparalled rise in terms of trade and contributed to rapid income growth, especially in resource rich states, unadjusted MFP in Australian mining declined.

Issues

An explanation for the apparent decline in mining productivity is that high commodity prices have provided firms with incentives to: one, extract from marginal resource deposits that were previously unprofitable due to high costs of extraction, and two, utilise proportionally more inputs in their operations, so as to increase rates of extraction.

ABS data shows that, at least in the 1990s, mining productivity grew positively when capital grew at a faster rate than labour. By contrast, when capital grew at a slower rate than labour in the 2000s this coincided with a fall in measured mining productivity. This trend and declining capital productivity is a possible explanation for a decline in productivity in the, Australian mining sector in the 2000s relative to the 1990s.

The trend of decelerating mining productivity growth is not confined to Australia. For example, Bradley and Sharpe (2009) analysed mining productivity in Canada, United States and Australia and found that the productivity performance of mining declined in each country at the annual rate of 1.07 in Canada, 1.68 in United States and 1.99 in Australia between 2000 and 2007.

Mining productivity measurement issue

Resources extraction is different to other production activities in that mineral deposits deplete in quality as the resource extraction activity increases. As a result, conventionally measured, or unadjusted MFP can change as a result of factors other than production efficiency. If the production is homogeneous, and each additional unit of output can be produced by the equal amount of labour and capital input as the previous output unit, then a fall in MFP conveys inefficient use of inputs, due to management or other external reasons. By contrast, in mining, if resource quality declines (either because of ore quality depletion, or resources becoming deeper underground), each additional unit of output warrants more and more units of labour and capital inputs which is independent of management performance, or input inefficiency. The ABS unadjusted MFP data does not account for depleting resource quality. As a result, it does not provide an appropriate measure of Australian mining productivity.

A decline in either the quality or accessibility of ore bodies will increase the use of energy use per unit of output. Energy use data (BREE 2011) can, therefore, be used to estimate the extent to which depletion in ore bodies contributes to changes in output each year.

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The ratio of value added in the mining sector to energy use (petajoules, PJ) in a year can be used as a measure of energy productivity. It follows that potential or quality adjusted output in mining can be estimated by keeping the first year’s energy productivity constant over the period of study. That is, each successive year’s potential or adjusted output is obtained by comparing the use of energy in a given year with the first year’s energy productivity.

National Mining productivity

The MFP growth rates before and after adjustment are represented in Figure 1. Two adjustments are made to obtain an appropriate means of mining productivity. First, a depletion adjustment is undertaken to account for reductions in quality of ores using energy use as a proxy for depletion. Second, an adjustment is made for delays or lags from when inputs, especially capital is deployed and when output changes occur.

Figure 1 shows that the MFP growth rate rises at an average annual rate of growth between 1985–86 and 2009–10 from unadjusted measure of –0.65 per cent to 2.5 per cent with capital and output adjustments.

Figure 1: Unadjusted and adjusted MFP growth, (per cent per year) for Australian mining, 1985–86 to 2009–10


Neither unadjusted (conventionally measured by ABS) MFP nor the adjusted MFP grew at the same rate throughout the study period. Therefore, MFP growth rates are divided into two periods. Figure 2 shows MFP growth rates over two time periods – from 1989–90 to 1999–2000, and from 2000–01 to 2009–10 that includes the millennium mining boom period.

Figure 2: Unadjusted and adjusted MFP growth rates, (per cent) over time intervals, Australian mining, 1989–90 to 2009–10


Unadjusted MFP sharply fell and declined at an average rate of 3.1 per cent over the 2000s. This suggests that natural resource depletion was much greater in the 2000s than in the 1990s. In the 2000s, after the adjustment for depletion and lagged use of capital and labour, the growth of MFP was 1.6 per cent a year, compared to the 2.1 per cent adjusted MFP growth rate in the 1990s.

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Regional and sectoral MFP growth

Table 1 shows that when resource depletion and capital lag effects are removed, adjusted MFP in each state grew at a higher rate compared to when depletion and lag effects are not considered.

After accounting for the influence of resource depletion and production lags, adjusted MFP grew at a positive rate in most states. Victoria is the only state where MFP grew at a negative rate even after the adjustment. This is attributed to exogenous depletion in oil and gas resources in the state.

Table 1: Adjusted and unadjusted state MFP growth rates 1990–91 to 2009–10 Unadjusted MFP Adjusted MFP

Western Australia –1.48 0.96 Queensland 0.74 3.65 New South Wales 1.7 5.1 Victoria –9.1 –0.6 Northern Territory 2.5 10.3 South Australia –1.87 NA Tasmania 1.89 NA

Source: ABS 5220.0 and BREE estimates

At the sub-industry level, only two sectors, coal-mining and oil and gas mining, were evaluated in terms of their productivity. This is because the required energy use data, needed to make productivity adjustment were available just for these two sectors.

When resource depletion and capital lag effects are removed, MFP in each sector, coal mining and oil & gas-mining, grew at a higher rate compared to when depletion and lag effects were not removed (0.83 per cent against 0.46 per cent for coal mining; and –4.5 per cent a year against –10.70 per cent for oil and gas mining). The oil and gas sector appears not to have suffered MFP decline as a result of endogenous depletion alone (deliberate or deeper extraction), but due to the exogenous depletion of oil because of a reduction in the flow rate in traditional extraction locations, particularly in Victoria.

MFP growth and decomposition

MFP studies facilitate the decomposition of MFP growth into technical efficiency change, technological change, and scale effects, that is.

MFP = TP+SC+TEC where MFP = multifactor productivity growth; TP = technological change (progress); SC = scale effects; and TEC = technical efficiency change.

TEC refers to the “catch up’ of firms in an industry where there already exists better technology in the industry. By contrast, the process of technological progress (TP) represents a shift in the production frontier to a higher level using the same inputs. Scale effects represent changes in MFP that arise from changes to the scale of output or production.

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A mining productivity growth decomposition over the study period shows that technical efficiency and scale effects contributed positively, and significantly to Australian Mining MFP. This decomposition shows that Australian mining experienced no statistically significant technological change, after removing the effect of depletion.

Innovation and new technology

The cost of digging deeper and processing ores can be reduced by better machinery and equipment. Australia has a long history of underground mining and has also employed innovations in hard-rock mining, such as block-caving and sublevel-caving technologies. In oil and gas production, developments in drilling technology have led to an increase in the use of steeply inclined and even horizontal drilling during the past three decades, allowing access to resources that were not economic using standard vertical wells. Continued developments in drilling technology have also allowed oil to be extracted from what would have previously been uneconomic wells.

Bradley and Sharpe (2009) found half of the mining establishments introduced new technologies, and most mining establishments in Canada purchase off-the-shelf technologies, or customise and modify existing technologies. This study however, found no significant depletion effect in Canadian mining.

In Australia, the extent of resource depletion has long been established (Mudd 2007, Topp et al. 2008). As Australian resources become progressively more difficult to mine, mining companies will need to continue to innovate to remain competitive.

Innovations and technological progress are key derivers of productivity growth over the long term. A decline in the quality of resource deposits that results from the mining of marginal or deeper resources is associated with a rise in the unit cost of extraction. Growth in innovations, a more skilled workforce, a faster rate of adoption of better off-the-shelf technologies as well as new technological breakthroughs would all likely assist in productivity growth of the Australian mining sector.

Conclusion

For Australian mining as a whole, after removing the influence of both output quality depletion and production lags, multifactor productivity grew at an average annual rate of 2.5 per cent between 1985–86 and 2009–10. When resource depletion and capital lag effects are accounted for, MFP in each state grows at a higher rate compared to when depletion and lag effects are not considered. Further, after resource depletion and capital lag effects are removed, MFP in the coal mining, and oil and gas mining sectors grew at a higher rate compared to when depletion and lag effects are not considered.

In sum, although productivity fell in the first decade of the Millennium Mining Boom relative to the 1990s, adjusted MFP growth was positive. Much of the apparent decline in unadjusted MFP in Australian mining over the past decade is attributable

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to both exogenous and endogenous resource depletion, and also lags between use of inputs and increased output.

References

ABS (Australian Bureau of Statistics), 2011, Estimates of Industry Multifactor Productivity, 2010–11, cat. no. 5260.0.55.002, Canberra.

ABS 2012 (various years), Australian National Accounts: State Accounts, cat. no. 5220.0, Canberra.

Bradley, C. and Sharpe, A., 2009, A Detailed Analysis of the Productivity Performance of Mining in Canada, Centre for the Study of Living Standards, prepared for the Micro-Economic Policy Analysis Branch of Industry Canada, September.

BREE (Bureau of Resources and Energy Economics), 2011 and various years, Australian Energy Statistics.

Grafton, Q. 2012, The Importance, Drivers and Phases of the Millenium Mining Boom, Resources and Energy Quarterly, September 2012, BREE, Canberra.

McKinsey Global Institute 2012, Beyond the boom: Australia’s productivity imperative, August.

Mudd, G.M. 2007, The Sustainability of Mining in Australia: Key Production Trends and Their Environmental Implications for the Future, Research Report No. RR5, Department of Civil Engineering, Monash University and Mineral Policy Institute, October.

Topp, V., Soames, L., Parham, D., and Bloch, H. 2008, Productivity in the Mining Industry: Measurement and Interpretation, Productivity Commission Staff Working Paper, December.

Syed A, Grafton Q, and Kalirajan K, 2013, Productivity in the Australian Mining Sector, Bureau of Resource and Energy Economics, March

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Energy in Australia 2013

Tom Willcock

Australia has a large, diverse energy resource base which includes coal, uranium, natural gas, oil and renewable energy resources. These extensive resources underpin Australia’s reliable and affordable domestic energy use as well as allowing significant exports. With the exception of oil, they are expected to last for many more decades, even as production increases.

This review covers some of the fundamental aspects of energy use and development in Australia, including production, consumption and exports as well as specific discussion of fuel types (such as renewables, coal, gas and oil) and usage (such as in the electricity and transport fuels sectors). More information on energy in Australia can be found in BREE’s recently released Energy in Australia 2013 publication, available at www.bree.gov.au.*

Production and consumption

In 2010–11, Australia’s energy production, for both domestic consumption and export, was 16 640 petajoules (PJ). Net energy exports (exports minus imports and stock changes) accounted for 63 per cent of total energy production in 2010–11 (10 540 PJ), while domestic consumption accounted for the remaining 37 per cent (6 100 PJ).

Figure 1: Australia’s primary energy production, 1974–75 to 2010–11


The vast majority of Australia’s coal and gas (around 8 053 PJ or 80 per cent of total coal and 1086 PJ or 72 per cent of total gas) production is exported, along with all of Australia’s uranium production (3 267 PJ). Oil, however, is a net import good for Australia; consumption (2 195 PJ) significantly exceeds domestic production (1 021 PJ, the majority of which is exported).

The share of black and brown coal in domestic energy use has been declining over the past two years, primarily as a result of substitution towards gas and cleaner energy sources, particularly in the electricity generation sector. In 2010–11, coal

The views expressed in this review are those of the author alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.

* Some of the sections, figures and tables in this review are amalgamated or abridged from the full versions in the original Energy in Australia 2013 publication for brevity.

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represented around 35 per cent of the energy mix, slightly less than petroleum products (36 per cent). The share of gas has grown consistently over the past 20 years and currently represents around 25 per cent of Australian energy consumption. The share of renewables, however, has remained largely constant at around 4 per cent over the same time period.

Figure 2: Australia’s total energy consumption, 1974–75 to 2010–11


Figure 3 shows Australia’s energy flows from the supply point on the left hand side to final use by industries and households on the right hand side. Domestically produced or imported primary energy may be used directly, but is generally first consumed by transformation sectors (such as refineries and power plants) for use as petroleum products and electricity. In addition, many final energy products are not manufactured in Australia, but are directly imported for use by Australian industries and households (shown along the bottom of the figure).

Figure 3: Australia’s energy flows, 2010–11, petajoules


Figure 4 shows how the energy mix across the states and territories largely reflects the population, industry structure, geography, and resource endowments of each region. For example, in Western Australia the size of the mining sector and its proximity to abundant gas resources results in gas supplying more than half of the state’s total energy consumption.

Figure 4: Total primary energy supply, by state and sector, 2010–11


Electricity use

The electricity industry consists of generators, transmission and distribution networks, and retailers. It is one of Australia’s largest industries and comprised 1.7 per cent of industry gross value added in 2010–11. Between 2001–02 and 2011–12, Australia’s electricity generation increased at an average rate of 1.7 per cent a year. However, in 2011–12, Australia’s electricity generation is estimated to have increased by less than 1 per cent relative to 2010–11 to total 255 terawatt hours (Table 1). Moderate economic growth, energy efficiency measures, and milder weather in the eastern and south eastern states helped to offset growing electricity demand from the mining sector.

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Most of Australia’s electricity is produced using coal, which is estimated to have accounted for 70 per cent of total generation in 2011–12. Coal is a relatively low cost energy source in Australia, primarily reflecting the abundance of reserves along the eastern seaboard, where the majority of electricity is generated and consumed.

Gas is Australia’s second largest source of electricity generation, accounting for 20 per cent of generation in 2011–12, a considerable increase over use a decade ago. Renewable energy sources, mainly hydroelectricity, wind and bioenergy, accounted for the majority of the remaining 10 per cent of electricity generation in 2011–12.

Table 1: Australia’s electricity generation, by energy source, 2006–07 to 2011–12

2007-08 2008-09 2009-10 2010-112011-12 p

TWh TWh TWh TWh TWh

Black coal 129.6 127.3 123.7 116.9 120.3

Brown coal 54.7 57.0 56.1 55.3 57.0

Gas 35.0 38.9 44.6 49.0 50.0

Hydro 12.1 11.9 13.5 16.8 14.1

Wind 3.1 3.8 5.1 5.8 6.1

Other a 8.9 9.9 9.2 8.8 7.2

Total 243.2 248.7 252.2 252.6 254.7

a Includes multi-fuel, oil, bioenergy and solar PV power plants. p BREE preliminary estimateSource: BREE 2013, Energy in Australia 2013

Clean energy

Renewable energy accounted for around 4 per cent (or around 260 petajoules) of Australia’s energy consumption in 2010–11. While the composition is constantly changing, the overall share of renewables in Australia’s energy mix has been reasonably constant over the past two decades. Hydroelectricity and various forms of bioenergy have been the dominant sources of renewable energy for even longer. In recent years, however, a number of new technologies such as wind and solar energy have emerged to gain increasing shares of the fuel mix. There is also potential for growth in other emerging technologies such as geothermal and ocean energy in coming decades.

Australian production of renewable energy (including both electricity generation and direct use) was dominated by wood and wood products (36 per cent), hydroelectricity (23 per cent) and bagasse (16 per cent) in 2010–11. Wind (8 per cent), solar (5 per cent) and other forms of bioenergy (10 per cent) accounted for the remainder (Figure 5). Most solar energy is used for residential water heating, which accounts for around 2 per cent of final energy consumption in the residential sector.

Figure 5: Australia’s renewable energy production a, 2006–07 to 2010–11


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Interest in clean energy investment is continuing to grow, supported by technology advancements, improving commercial viability and supportive government policies such as the carbon price and renewable energy target. Over time this will contribute to a major shift in the Australian energy landscape, with clean energy playing a larger role in the energy mix. Primary energy consumption is expected to grow at around 3.6 per cent from 2012–13 to 2049–50, to account for 14 per cent of total energy consumption. This growth is most evident in electricity generation where renewables are forecast to provide over 50 per cent of supply in 2049–50 (Table 2).

Table 2: Projected renewable electricity generation, by energy type, to 2049–50

Amount (TWh)

Share of total electricity generation (%)

Average annual growth (%)

2012-13 2034-35 2049-50 2012-13 2049-50 2012-13 to 2049-50

Renewables 34 130 194 13 51 4.8

Hydro 17 17 17 7 5 0

Wind 14 64 78 6 21 4.7

Bioenergy 2 7 7 1 2 3.9

Solar 1 25 62 <1 16 12.3

Geothermal 0 17 29 0 8 na

Total a 253 324 377 100 100 1.1

Source: BREE 2013, Energy in Australia 2013

Coal

Coal is one of Australia’s largest commodity exports, with earnings of around $48 billion in 2011–12. Australia’s success in world coal markets has been based on reliable and competitive supplies of high quality metallurgical and thermal coal. Coal also provides a component of Australia’s domestic energy needs, accounting for around 70 per cent of electricity generation in 2011–12.

Australian black coal production increased at an average annual rate of 1.4 per cent between 2007–08 and 2011–12, as robust investment and global demand was offset somewhat by flooding events in 2010–11 (Table 3). This growth was supported by the commissioning of new mines, rail networks and ports in Queensland and New South Wales. In 2010–11, Australian black coal production declined by 10 per cent as production was hampered by floods in Queensland and heavy rainfall over New South Wales in January and June 2011. Growth in production rebounded in 2011–12 as production began increasing at flood affected mines before yet more flooding in early 2012.

Table 3: Australia’s coal production a, by state, 2007–08 to 2011–12 2007-08 2008-09 2009-10 2010-11 2011-12

Mt Mt Mt Mt Mt

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Brown coal

Victoria 66 68.3 68.8 65.7 na

Total 66 68.3 68.8 65.7 na

Black coal

Queensland 180.5 190.4 207.4 179.8 171.6

New South Wales 135 137.8 147.3 156.9 167.2

Western Australia 6.2 7 6.7 4 4

South Australia 3.9 3.8 3.8 3.8 3.8

Tasmania 0.6 0.6 0.6 0.6 0.6

Total 326.2 339.6 365.9 345.2 347.2

a Saleable production.Source: BREE 2013, Energy in Australia 2013

Around 87 per cent of Australia’s black coal production is destined for export. Australia accounts for 27 per cent of world black coal exports—51 per cent of metallurgical coal exports and 18 per cent of thermal coal exports. Japan is Australia’s largest export destination for black coal (Table 4). China, the Republic of Korea, India and Chinese Taipei are also significant destinations.

Table 4: Australia’s coal exports, by type and destination, 2007–08 to 2011–12 2007-08 2008-09 2009-10 2010-11 2011-12

Mt Mt Mt Mt Mt

Metallurgical coal

China 1.53 14.75 27.28 15.72 21.2

European Union 27 24.51 14.69 15.61 17.07 17.71

India 24.23 24.28 31.38 30.91 29.26

Japan 50.2 42.22 48.46 42.61 40.25

Korea, Rep. of 8.36 13.05 15.86 16.44 16.37

Other 28.09 16.25 18.67 17.7 17.6

World 136.92 125.24 157.26 140.45 142.39

Thermal coal

China 1.48 8.4 13.92 16.67 28.48

Chinese Taipei 18.56 20.3 19.55 20.12 17.34

Japan 66.92 62.58 66.41 66.96 69.71

Korea, Rep. of 18.55 30.14 24.84 28.19 28.85

Other 9.56 14.94 10.26 11.38 14.06

World 115.07 136.36 134.98 143.32 158.44

Total coal 251.99 261.6 292.25 283.77 300.83


Gas

Gas (conventional and unconventional) is becoming increasingly important for Australia, both as a domestic energy source and as a provider of export income (around half of all production was exported in 2011–12). Since 1999–2000, domestic

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gas consumption has increased at an average annual rate of 4 per cent, and now accounts for 25 per cent of Australian energy consumption, and around 20 per cent of electricity generation.

Australia’s conventional gas production is predominantly sourced from three basins: the Carnarvon (north-west Western Australia), the Cooper/Eromanga (central Australia) and the Gippsland (Victoria). These basins accounted for 83 per cent of production in 2011–12. Queensland produces a significant, and rapidly increasing, quantity of Australia’s unconventional coal seam gas (Table 5).

Table 5: Australia’s gas production, by state and type a, 2007–08 to 2011–12 2007-08 2008-09 2009-10 2010-11 2011-12State PJ PJ PJ PJ PJ

Queensland

– Conventional 28 27 21 10 4

– Coal seam gas 129 150 195 233 241

– Total 157 177 216 243 245

New South Wales

– Coal seam gas 5 5 6 6 6

Victoria 313 274 270 342 334

South Australia 78 134 107 41 45

Western Australia 1143 1235 1371 1439 1458

Northern Territory b 22 22 27 20 20

Australia 1717 1846 1997 2091 2353a conventional unless otherwise labelled. b Joint Petroleum Development Area gas used in Darwin not included.Source: BREE 2013, Energy in Australia 2013

The geographical distance between Australia and its key gas export markets prevents trade by conventional pipeline transport. Instead, cooling the gas to a liquefied state (at –161oC) allows the volume to be reduced sufficiently to enable it to be shipped as Liquefied Natural Gas (LNG).

Until 1989–90, all of Australia’s gas production was consumed domestically. Following the development of the North West Shelf Venture gas fields, located in the Carnarvon Basin (off the north-west coast of Western Australia), Australia began exporting LNG to overseas markets. Since 2005–06, LNG has also been exported from Darwin, and in 2012 Pluto LNG (in WA) became Australia’s third gas export facility.

Australia’s LNG exports were 19 million tonnes in 2011–12, a slight decrease of 4 per cent relative to 2010–11 (Figure 6). This was primarily a result of maintenance at key LNG facilities (North West Shelf LNG in late 2011 and Darwin LNG in early 2012). Export value increased to just under $12 billion, however, as rising prices more than offset falling output. This was primarily caused by oil market price rises, to which most Asian LNG prices are linked. Australia’s major LNG trading partners include Japan, China and the Republic of Korea.

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Figure 6: Australia’s LNG exports, by volume and value, 2001–02 to 2011–12


Petroleum and liquid fuels

Liquid fuels, and petroleum in particular, are a major component of Australia’s energy market. Unlike other primary energy sources, Australia is a net importer of refinery feedstock (crude oil and condensate) and refined petroleum products. In 2011–12, Australia imported 29.5 gigalitres of crude oil and other refinery feedstock (Table 6). The high proportion of imports as a share of total production is because a significant percentage of Australia’s oil production is exported. Two factors support these exports. First, the majority of Australia’s oil production is off the north-west coast of Western Australia, so is closer to Asian refineries than domestic refineries on the east coast. Second, crude grades produced in Australia are generally not as well suited for use by Australian refineries as those from some foreign countries.

Table 6: Australia’s petroleum product market, 2007–08 to 2011–12 2007–08 2008–09 2009–10 2010–11 2011-12

ML ML ML ML ML

Production

Crude oil 18234 18356 16638 17333 14932

Condensate 7376 8051 8945 8435 7476

Liquefied petroleum gas 3971 3929 4097 3909 3815

Refined products 39575 39546 37200 38393 36436

Imports

Crude oil and other refinery feedstock 26223 24302 27284 31766 29495

Refined products 17982 19697 19967 18771 21188

Exports

Crude oil and other refinery feedstocks 15975 16588 18064 19636 17424

Refined products 1807 1164 850 760 1234Liquefied petroleum gas 2589 2500 2776 2471 2115


The petroleum refining industry in Australia produces a wide range of petroleum products such as gasoline, diesel, aviation turbine fuel and LPG, which are derived from crude oil and condensate feedstock. In 2011–12, Australian refineries produced 15.6 gigalitres of petrol and 12.3 gigalitres of diesel, comprising 43 per cent and 34 per cent of Australia’s total production of petroleum products respectively. In 2011–12, total Australian refinery production decreased by 5 per cent from 2010–11 to 36.4 gigalitres (Table 6).

In October 2012, Shell stopped refining operations at the Clyde refinery in Sydney which had been in operation since 1928. Also in 2012, Caltex announced their intention to proceed with a proposal to close the Kurnell refinery and convert the facility into a major import terminal in the second half of 2014. These moves

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highlight the increasingly competitive international market Australian refineries face. Higher labour and construction costs compared to nearby Asian markets, combined with the need to build at huge volume to fully utilise economy of scale benefits, are key drivers of falling domestic refining capacity.

Despite falling production, Australian demand for transport fuels has been rising steadily over the past decade. It increased by around 24 per cent from 41 gigalitres in 2001–02 to 51 gigalitres in 2011–12. The majority of Australia’s sales of transport fuels are diesel, followed by petrol and aviation fuels (Figure 7).

Growth in the mining sector has been a key driver of increasing diesel use. Petrol demand, on the other hand, has been falling due to increased fuel efficiency and growth in ethanol blended fuel use. Increasing use of excise-free automotive LPG stopped in 2004 following the announcement of the phase-in of taxes on excise exempt fuels, and has been stagnant since.

Figure 7: Australia’s sales of transport fuels, 2001–02 to 2011–12


Conclusion

Australia is fortunate to have abundant, diverse, and high quality energy resources, including both renewable and non-renewable resources. Reliable and affordable supply of these resources has, and will continue, to underpin Australia’s export economy and domestic economic growth. Furthermore, recent trends, such as decreasing domestic energy intensity and the increasing use of gas and renewable resources, have been supported by investment in new technologies and responsive Government policies. Overall, Australia’s energy market is in robust shape and its future looks bright.

Reference

Bureau of Resource and Energy Economics (2013). Energy in Australia 2013, Canberra, May.

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Resourcesand Energy

QuarterlyStatistical tables

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Contribution to GDP


Principal markets for Australian imports in 2011–12 dollars


Principal markets for Australian exports in 2011–12 dollars

Please refer to page 89 of the Resources and Energy Quarterly – March quarter 2013 PDF version.

Resources and energy sector indicators, Australia


Principal markets for Australian resources and energy exports


Resources and energy prices, ended March Quarter 2013

Please refer to pages 92–93 of the Resources and Energy Quarterly – June quarter 2013 PDF version.

Tables 1–2

Please refer to the corresponding Excel sheets of the Resources and Energy Quarterly – June quarter 2013 Statistical data Excel workbook.

Table 3: Contribution to exports by sector, balance of payments basis


Tables 4–41:

Please refer to the corresponding Excel sheets of the Resources and Energy Quarterly – June quarter 2013 Statistical data Excel workbook.

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BREE contactsExecutive Director/Chief

Economist – BREE

Quentin Grafton [email protected]

(02) 6243 7483

Deputy Chief Economist/Research

Director

Wayne Calder [email protected]

(02) 6243 7718

Resources Program – Program

Leader

John Barber [email protected]

(02) 6243 7988

Modelling & Policy Integration –

Program Leader

Arif Syed [email protected]

(02) 6243 7504

Energy and Quantitative Analysis –

Program Leader

Nhu Che [email protected]

(02) 6243 7539

Data & Statistics Program –

Program Leader

Geoff Armitage [email protected]

(02) 6243 7510

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