Further information Creative Commons licence...another material change since the September 2020...

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

EditorDavid Thurtell

Chapter AuthorsResource and energy overview: David Thurtell

Macroeconomic overview and oil: Nathan Pitts

Steel, iron ore and uranium: Mark Gibbons

Metallurgical and thermal coal: Jeremy Coghlan

Gas: Monica Philalay

Gold, aluminium, alumina and bauxite: Thuong Nguyen

Copper and nickel: Kate Martin

Zinc and lithium: Caroline Lewis

AcknowledgementsThe authors would like to acknowledge the contributions of:

Allison Ball, Jeewantha Karunarathna, Russell Campbell and Lou Brooks

Cover image source: Shutterstock

ISSN 1839-5007

Vol. 10, no. 4

© Commonwealth of Australia 2020

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AttributionContent contained herein should be attributed as follows:

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

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

This publication is not legal or professional advice. The Commonwealth of Australia does not guarantee the accuracy or reliability of the information and data in the publication. Third parties rely upon this publication entirely at their own risk.

Attribution 4.0 International LicenceCC BY 4.0

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Contents

Foreword 4

About the edition 5

Overview 6

Macroeconomic Outlook 16

Steel 26

Iron Ore 32

Metallurgical Coal 41

Thermal Coal 52

Gas 68

Oil 80

Uranium 90

Gold 96

Aluminium 105

Copper 115

Nickel 123

Zinc 130

Lithium 139

Trade summary charts and tables 148

Appendix A: Definitions and classifications 155

Appendix B: Glossary 158

Appendix C: Contact details 164

4Resources and Energy Quarterly December 2020

Foreword The outlook for Australia’s energy and resource commodity exports has improved overall since our last report in September, despite further waves of COVID-19 in many of the world’s major economies. The markets for most minerals have tightened in recent months, as manufacturing and travel activity — and hence resource and energy commodity demand — recovers, alongside some cuts to supply. The global supply of some commodities has declined as the low prices of the June and September quarters forced plant closures, and as COVID-19 outbreaks impact on workers at various mining and refining operations around the world.

The rollout of an effective COVID-19 vaccine presents the opportunity to bring the pandemic under control in major economies in the first half of our two year outlook period. This will boost economic activity and commodity demand, but also reduce outages to supply. The timing and pace of the recovery is difficult to predict, and influenced by policy decisions that governments make to support economic recovery. The IMF forecasts a contraction in the world economy of 4.4 per cent in 2020, but a resumption in growth of 5.2 per cent in 2021. However, news of at least three effective vaccines postdates the IMF’s outlook, suggesting upside risks to these forecasts.

Rising commodity prices and Australia’s relative success at containing COVID-19 have helped strengthen the Australian dollar further in recent months, partly diminishing the impact on export earnings of rising prices.

Coal markets are in a state of flux dealing with issues quite separate to COVID-19. Shipments of (mainly Australian) coal faced delays at Chinese ports. Price differentials have changed dramatically; the bottom line for Australian coal producers is lower profitability and the likelihood of production cuts the longer the Chinese restrictions remain in place.

Besides the discovery of a number of promising COVID-19 vaccines, another material change since the September 2020 Resources and Energy Quarterly is the election of a new US Administration, effective on 20 January 2021. President-elect Biden has flagged an intention to make policy changes in relation to trade policy and emissions reductions. China,

Japan and South Korea also announced targets to reach net zero emissions in either the mid or early second half of the century. These targets sit outside our two year outlook period, and the impacts year to year will be driven by the timing and scope of the policies implemented to achieve them.

China’s economy has maintained growth, albeit slower, through the COVID-19 pandemic and the IMF is projecting growth of 8.2 per cent in 2021. This outlook has been helped by stimulatory policy actions and high foreign demand for goods needed to cope with the pandemic. Beijing appears ready to postpone further stimulus measures, satisfied with its current policies.

Australian iron ore earnings appear set to record an all-time high in 2020–21: strong demand from China and a recovery in American, Japanese, South Korean and European demand has added to the impact of ongoing supply problems in Brazil. After topping $102 billion in 2019–20, iron ore export earnings are forecast to be $123 billion in 2020–21. Gold has surrendered some of the sharp gains of 2020, but is still high in historical terms; export earnings are on track to set a new record (of about $30 billion) in 2020–21. Base metals have recovered to pre-COVID-19 levels, as the market looks to a successful vaccine rollout. Spot LNG prices are now above pre-COVID-19 levels, as demand picks up ahead of the Northern Hemisphere winter and the impact of (mainly US) supply cutbacks and disruptions flow through.

Annual resource and energy exports are forecast to remain over a quarter of a trillion dollars in the outlook period — at $279 billion in 2020–21 and $264 billion in 2021–22. One downside risk is for substantial delays in the successful rollout of the COVID-19 vaccines to a large number of the world’s working population. Another downside risk is the extent of further disruption to Australian trade with China.


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

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

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

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

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

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

Data in this edition of the Resources and Energy Quarterly is current as of 8 December 2020.

Resources and Energy Quarterly publication schedule

Publication Expected release date Outlook period final year

March 2021 29 March 2021 Australian data: 2025–26 World data: 2026

June 2021 28 June 2021 Australian data: 2022–23 World data: 2023

September 2021 30 September 2021 Australian data: 2022–23 World data: 2023

December 2021 20 December 2021 Australian data: 2022–23 World data: 2023

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

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Resources and Energy Quarterly December 2020

1.1 Summary Since last quarter, Australia’s outlook for resource and energy exports

has improved overall. World economic activity has rebounded, with the demand for resource

and energy commodities picking up. Oil consumption and prices are down in 2020, but set to recover partially as lockdown measures ease.

While volumes are set to rise, export earnings are expected to be down on 2019–20, largely driven by lower LNG prices in 2020–21 and lower iron-ore prices in 2021–22, after recently making 7-year highs.

Australian coal prices should recover over the outlook period.

1.2 Export values Australia’s export values are estimated at about $279 billion in 2020–21 In the December quarter 2020, the Office of the Chief Economist’s (OCE) Resources and Energy Export Values Index declined 0.8 per cent from a year before; a 0.5 per cent fall in prices added to a 0.2 per cent volume decline. Australian resource and energy exports are estimated at $276 billion in 2020, down $21 billion on calendar 2019.

In the outlook period, exports are forecast at $279 billion in 2020–21 and $264 billion in 2021–22 (Figure 1.1), down from a record $291 billion in 2019–20. Lower USD commodity prices and Australian dollar gains will likely more than offset the impact of export volumes gains which appear set to rise marginally in 2020–21 notwithstanding COVID-19 (Figure 1.2).

Rising Australian dollar constraining earnings In Australian dollar terms, the OCE’s Resources and Energy Commodity Price Index rose by 3.3 per cent (preliminary estimate) in the December quarter to be flat on a year ago. In US dollar terms, the index rose by 4.7 per cent in the quarter, and was 6.0 per cent higher than a year ago. The index of prices for resource commodity exports (Australian dollar terms) rose by an estimated 21.8 per cent in the year to the December quarter 2020, while energy commodity prices fell by 29.2 per cent (Figure 1.3).

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

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

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

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

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Figure 1.3: Resource and energy export prices, AUD terms

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

1.3 Macroeconomic, policy, trade and other factors With global economic activity rebounding, the demand for resources and energy is steadily rising, running down inventories built up at the height of COVID-19 lockdowns. The demand for energy remains the most affected, though a colder than normal Northern Hemisphere winter now seems to be offsetting that significantly. Households have built up their savings; while they are consuming fewer services and socialising and travelling less, goods consumption has rebounded, helping to lift industrial output and world trade.

Since the first wave of COVID-19, the mortality rate of COVID-19 has diminished, as treatments become more effective and as infections are concentrated among younger people with stronger immune systems. In addition, some effective vaccines appear to have been discovered, the rollout of which promises to restore increasing normalcy to (daily working and living) economic activity in major economies in the first half of the outlook period.

With air travel still heavily restricted and land-based travel in most nations still below pre-COVID levels, oil demand is weak but recovering. It may take the widespread rollout of COVID-19 vaccines before international travel returns to pre-COVID-19 levels. Travel ‘bubbles’ between nations with negligible infection rates could see some recovery in air travel in the coming months, boosting a recovery in tourism and oil consumption.

There are reports Chinese authorities may be reluctant to take fresh, large stimulatory measures, as the Chinese economy pushes further above pre-pandemic levels and resumes growing at its pre-pandemic pace. China’s property sector has cooled, in response to modest government measures.

There is potential for US policy changes that could affect both world growth and resource and energy commodity markets. President-elect Biden is due to take office on 20 January 2021 and has signalled an intent to make some large shifts to US policy, including in trade and in re-joining the Paris Climate Accord.

The emphasis of some governments’ COVID-19 recovery stimulus spending is towards ‘green’ infrastructure, and also to ensuring domestic production of essential goods and services to reduce supply chain vulnerabilities. ‘Green’ infrastructure will be resource-commodity intensive, boosting resource commodity demand.

The most recent IMF forecasts — made prior to news of promising COVID-19 vaccines — put world GDP growing by slightly more than 5 per cent in 2021. This would see the world economy recover a loss of slightly more than 4 per cent in 2020. IMF forecasts world GDP growth to then moderate towards more typical levels in 2022. Resource and energy commodity demand should thus recover over the outlook period. The extent of further official and unofficial Chinese government restrictions on imports of some Australian goods poses a downside risk to the forecasts. The current restrictive measures in place are being closely monitored for implications to our outlook. At this stage, there is a high degree of uncertainty around the extent to which they will persist throughout the outlook period, as well as the timing and extent to which Australia’s exports can find alternative markets.

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Resources Energy Total resources and energy


1.4 Prices The iron ore price has remained strong since the September 2020 Resources and Energy Quarterly, currently at a 7-year high. A recovery in demand in some of the advanced industrialised nations has added to strong Chinese demand, to keep prices high in a market still heavily constrained by low Brazilian supply (Figure 1.4). Prices are expected to ease by 2022, as Brazilian supply recovers and China reduces stimulus.

After a minor recovery in the September quarter 2020, prices of Australian metallurgical coal have been hit sharply by a decline in Chinese imports. Metallurgical coal prices had been kept low by extremely weak ex-Chinese demand due to COVID-19. A modest lift in prices is likely over the forecast period, as high-cost mines are closed and ex-Chinese demand recovers. Winter heating demand from Asian coal-fired power utilities has combined with output cuts to help lift thermal coal prices. Further modest gains are likely in the outlook period, as demand recovers further (Figure 1.4).

Oil prices are steadily regaining some of the sharp declines of the first four months of 2020. Production cuts have combined with a recovery in demand to remove some inventory from the market. In the December quarter 2020, demand is likely to be impacted by targeted COVID-19 containment measures introduced in parts of the EU. The price should rise steadily during 2021 and 2022, but seems likely to be capped at US$60 a barrel, as shuttered US production re-enters the market. Australian LNG export values are expected to dip sharply in 2020–21: 75 per cent of our LNG is sold under contracts linked to oil prices with a lag of several months. Spot LNG prices have recovered strongly.

The gold price has lost some of its lustre, as news of several effective COVID-19 vaccines pushes investment flows away from safe havens. A recovery in scrap supply will offset improved jewellery demand over the outlook period. Further out, the price is likely to fall, as equity markets recover more broadly and real bond yields rise. Base metal prices have recovered their COVID-19 losses, largely on the back of the Chinese economic rebound (Figure 1.5). Base metal demand should rise as world industrial activity recovers further from COVID-19 restrictions.

Figure 1.4: Bulk commodity prices

Notes: Prices are in US dollars, and are the international benchmark prices Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

Figure 1.5: Base metal prices

Notes: Prices are in US dollars, and are the international benchmark prices Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

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1.5 Export volumes Sustained Australian export volumes, driven by resource exports The OCE’s Resources and Energy Export Volumes Index (preliminary estimate) rose by 7.1 per cent in the December quarter 2020 from the September quarter, but was 0.2 per cent lower than a year before (Figure 1.6). Within this total, resource commodity volumes rose by 3.5 per cent in the year to the December quarter, while energy commodity volumes fell by 7.1 per cent. The sharp decline in the volume of energy exports was driven by the slowdown in Asian economic activity due to COVID-19.

In volume terms, resources exports are likely to show modest growth over the outlook period. Economic growth and industrial production have rebounded amongst our main trading partners, increasing their demand for our ferrous and non-ferrous metals. Energy export volumes are forecast to recover pandemic losses during 2021 and then tend to level out. However, this is not sufficient to offset lower energy prices to allow export earnings to return to pre-COVID-19 levels. Australian coal producers are amongst the world’s most competitive producers, and would be quick to reopen mines and expand output after seeing a reduction in 2021–22.

Figure 1.6: Resource and energy export volumes


1.6 Contribution to growth and investment Mining industry contracted, but by much less than the rest of the economy Australia’s real Gross Domestic Product (GDP) rose by 3.3 per cent in the September quarter 2020, but was down 3.8 per cent through the year since the September quarter 2019.

Mining value-added fell by 1.7 per cent in the September quarter, to be down 2.3 per cent over the previous twelve months. Coal and oil/gas production fell significantly, while iron ore and ‘other’ mining grew modestly (Figure 1.7).

In the coming year, it is likely that the iron ore sector will make a significant contribution to GDP growth, as high prices and margins drive growing volumes. The coal sector is likely to make only a modest contribution to growth in the first half of the outlook period. Gas production is likely to make a positive contribution to growth, on the back of stronger LNG demand and a recovery in prices.

Figure 1.7: Contribution to quarterly growth, by sector

Source: ABS (2020) Australian National Accounts, 5206.0

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Mining investment is picking up The ABS Private New Capital Expenditure and Expected Expenditure survey for the September quarter 2020 shows that Australia’s mining industry invested $8.5 billion in the quarter. This is down by 7.5 per cent in the quarter, but up 1.6 per cent from the September quarter 2019. In recent quarters, growth in investment by the metal ore mining sector has been strong, albeit with a slight pullback in the September quarter (Figure 1.8). This likely reflects the surge in iron ore prices.

Figure 1.8: Mining industry capital expenditure by commodity

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

Expenditure fell in the September quarter for buildings and structures as well as machinery and equipment (Figure 1.9), though the latter remains well above its average level of recent years. Mining companies invested $35 billion in 2019–20, with forward expectations suggesting that investment in 2020–21 will be little changed (Figure 1.10). Strong prices for gold, iron ore and other minerals are leading to new investment plans, including the re-opening of mines. However, investment in new greenfield projects remains well below the levels of the previous decade.

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ure 1.9: Mining industry capital expenditure by type, quarterly

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

The Resources and Energy Major Projects publication, released in November 2020, suggests that investment in Australia’s minerals projects has entered a new growth cycle. Record gold prices have driven large investments in gold exploration, development and extraction, with a number of Australian gold mines returning to production. Some of these mines had been closed for more than 20 years.

An uptake in battery technology has also driven greater investment in nickel, cobalt, rare earths and lithium, with Australia now hosting around 60 projects in the ‘battery commodity’ space.

Slightly offsetting this, tough global conditions and low energy prices have weighed on the development of coal and LNG projects, with some being deferred as a result. Finance is likely to remain difficult for these projects.

Data on exploration spending (adjusted for inflation) suggests that mining capital expenditure is recovering at a marginal pace following falls in early 2020 (Figure 1.11). Exploration spending edged up in the September quarter, with spending for all commodities rising to $922 million.

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Figure 1.10: Mining industry capital expenditure, fiscal year

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

Figure 1.11: Mining capital expenditure vs exploration (real), quarterly

Source: ABS (2020) Private Capital Expenditure Survey, Chain Volume measure, 5625.0

1.7 Revisions to the outlook Over the outlook period, export earnings are now forecast to be $279 billion in 2020–21 and $264 billion in 2021–22. The new forecasts are up $22 billion and $12 billion, respectively, from those contained in the September quarter 2020 Resources and Energy Quarterly.

Stronger metal (mainly iron ore) exports have driven the upward revisions.

The forecast rise in the Australian dollar and lower coal and LNG revenues will be the main drivers of the drop in earnings in 2020–21 and 2021–22 compared with 2019–20.

Figure 1.12: Resource and energy exports, by forecast release


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Notes: f forecast. EUV is export unit value. Per cent change is from 2019–20. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

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Table 1.1: Outlook for Australia’s resources and energy exports in nominal and real terms

Annual percent change

Exports (A$m) 2018–19 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f Resources and energy 281,297 290,649 278,668 263,996 3.3 –4.1 –5.3 – realb 287,599 293,243 278,668 259,670 2.0 –5.0 –6.8 Energy 132,676 115,531 78,702 93,406 –12.9 –31.9 18.7 – realb 135,648 116,562 78,702 91,875 –14.1 –32.5 16.7 Resources 148,621 175,118 199,966 170,590 17.8 14.2 –14.7 – realb 151,951 176,681 199,966 167,795 16.3 13.2 –16.1

Notes: b In 2020–21 Australian dollars; f forecast. Source: ABS (2019) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

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Table 1.2: Australia's resource and energy exports, selected commodities

Prices Export volumes Export values, A$b Unit 2019–2020 2020–21f 2021–22f Unit 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f

Iron ore US$/t 78 107 86 Mt 858 899 906 103 123 95 Metallurgical coal US$/t 145 121 142 Mt 177 169 184 34 22 27 LNG A$/GJ 11.4 7.8 8.9 Mt 79 75 80 48 31 37 Thermal coal US$/t 63 58 64 Mt 213 199 222 20 15 16 Gold US$/oz 1,562 1,830 1,608 t 350 364 393 24 30 27 Alumina US$/t 282 269 284 Mt 17,876 18,082 17,948 7.4 7.0 6.9 Copper US$/t 5,666 6,683 6,606 Kt 925 920 941 10.1 10.8 10.7 Oila US$/bbl 52 45 52 Kb/d 291 304 308 9.0 7.2 8.3 Aluminium US$/t 1,675 1,814 1,916 Kt 1,430 1,345 1,385 3.7 3.4 3.5 Zinc US$/t 2,206 2,390 2,203 Kt 1,530 1,416 1,590 3.6 3.2 3.2 Nickel US$/t 13,982 14,989 15,491 Kt 231 209 253 3.8 3.7 4.4 Lithium US$/t 548 416 466 Kt 1,503 1,589 1,868 1.1 1.0 1.3 Uranium US$/lb 27 31 37 t 7,195 6,486 5,800 0.7 0.5 0.5

Notes: a Export data covers both crude oil and condensate; f forecast. Price information: Iron ore fob (free-on-board) at 62 per cent iron content estimated netback from Western Australia to Qingdao China; Metallurgical coal premium hard coking coal fob East Coast Australia; Thermal coal fob Newcastle 6000 kc (calorific content); LNG fob Australia's export unit values; Gold LBMA PM; Alumina fob Australia; Copper LME cash; Crude oil Brent; Aluminum LME cash; Zinc LME cash; Nickel LME cash; Lithium spodumene ore. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; LME; London Bullion Market Association; The Ux Consulting Company; US Department of Energy; Metal Bulletin; Japan Ministry of Economy, Trade and Industry; Department of Industry, Science, Energy and Resources (2020)

17


Summary The COVID-19 pandemic, and subsequent containment measures,

have significantly affected world industrial production and economic growth. The IMF assumes that the recovery will be unsteady and uneven across economies. The rollout of an effective vaccine will be influential.

The economic downturn has been limited by significant stimulatory policies. Governments have imparted fiscal stimulus to support businesses and workers, while central banks around the world have pushed down official interest rates and bought large amounts of debt.

The IMF expects that world economic activity contracts by 4.4 per cent in 2020, before growing by 5.2 per cent in 2021 and 4.2 per cent in 2022.

Global economic outlook The IMF is forecasting a contraction in the world economy of 4.4 per cent in 2020, as COVID-19 containment measures negatively affect economic activity. This forecast is less pessimistic than the 4.9 per cent decline in the IMF’s previous release in June 2020. This revision reflects June quarter economic activity declining by less than expected in many advanced nations, and June quarter Chinese economic growth surpassing expectations. Nonetheless, the economic recovery from the COVID-19 pandemic remains highly uncertain, as COVID-19 cases remain elevated in a number of nations, and some Eurozone governments have recently introduced containment measures against renewed COVID-19 outbreaks.

Governments around the world have introduced fiscal packages to address the widespread job losses and reduced working hours. Other measures have generally been aimed at supporting affected businesses and spending on health care. As COVID-19 cases have fallen in some countries, governments have announced further stimulus measures designed to facilitate the economic recovery. Some of these recovery packages include considerable green stimulus, which is likely to materially affect resources and energy demand over the outlook period. To accompany these fiscal stimulus measures, central banks around the world have reduced official interest rates, and many central banks have

ramped up quantitative easing programs. Despite these policies, prospects for the economic recovery are uncertain. Economic output over the outlook period is likely to be driven by the evolution of the pandemic, with risks arising from the possibility of renewed outbreaks, further containment measures, and an effective vaccine rollout.

In the December quarter 2020, there were reports of promising preliminary results for numerous COVID-19 vaccines. However, the timing that these vaccines will receive government authorisation remains uncertain, as does the pace that sufficient doses can be distributed around the world. Despite considerable uncertainty regarding the precise time that an effective vaccine(s) becomes available, it appears increasingly likely that this will occur sometime in 2021. This presents considerable upside risks for economic growth in 2021 and 2022.

Global trade is recovering from the earlier disruptions posed by falling consumer confidence and supply disruptions. Global merchandise export volumes in September rose by 1.5 per cent month-on-month, with these trade volumes only 1.8 per cent lower than pre-COVID-19 levels. Advanced economies’ exports rose by 2.1 per cent month-on-month to be 3.1 per cent lower than December 2019 volumes. Emerging economies’ exports rose by 0.3 per cent month-on-month, and are now 0.7 per cent above December 2019 volumes. Historically, global trade volumes growth is closely correlated to industrial production growth (Figure 2.1). It is likely that the peak impact on trade and industrial production was in May 2020, with the fall in the year to May comparable in magnitude to the global financial crisis. However, the COVID-19 induced downturn seems likely to be briefer in duration.

Government-imposed containment measures have had a significant impact on labour markets, particularly in the service sectors. Employment and business activity have also faced pressures from supply chain disruptions and lower consumer demand.

The global Services Purchasing Managers Index (PMI) declined to 52.2 in November, down from 52.9 in October. This was the fifth consecutive monthly reading above 50, indicating month-on-month expansion. These

18


growth readings follow the historic lows recorded in April and May, the peak impact of COVID-19 containment measures on the global services sector.

Figure 2.1: Industrial production and world merchandise trade

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

Although the largest economic impacts of the COVID-19 pandemic have been in the services sector, the global manufacturing sector has been significantly impacted by supply chain disruptions and falling household demand. The global manufacturing PMI was below 50 for most of the first half of 2020, falling to a historically low 39.6 in April. In November, the index rose to 53.7, a 33-month high. This was the fifth consecutive month above 50, although manufacturing performance across countries has recently diverged. For the 30 nations where data was available, 19 registered expansions and 11 contractions. Most of Australia’s major resources and energy export markets registered expansions (Figure 2.2).

The IMF expects global economic activity in 2021 to increase by 5.2 per cent. Advanced economies are forecast to grow by 4.8 per cent, and developing economies are expected to grow by 6.0 per cent (Figure 2.3). In 2022, global economic growth is likely to moderate to 4.2 per cent.

Figure 2.2: Manufacturing PMI

Source: Bloomberg (2020)

Figure 2.3: GDP growth

Source: Bloomberg (2020); IMF (2020)

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Major trading partner economic outlook China is Australia’s only major export market with projected growth in 2020 In the September quarter of 2020, the Chinese economy grew by 2.7 per cent quarter-on-quarter. The Chinese economy has recovered rapidly from the COVID-19 induced contraction of 10 per cent in the March quarter, posting 12 per cent growth in the June quarter. This rebound was a result of containment measures being rapidly relaxed during April, and a government-led infrastructure drive (Figure 2.4).

The Chinese government has introduced significant fiscal stimulus. In addition to an infrastructure drive, the Chinese government has granted tax relief and increased unemployment benefits. Fiscal stimulus has also been accompanied by interest rate cuts by the People’s Bank of China (PBOC). The PBOC has also cut the bank reserve requirement ratio, increased the money supply, and provided funds to increase the capacity of commercial banks to lend to small businesses. As a result, Chinese bank lending hit a record high in the first half of 2020.

Figure 2.4: Chinese residential buildings construction and prices


The Chinese manufacturing PMI increased marginally to 52.1 in November, the ninth consecutive month the index has been in expansionary territory. Chinese industrial production in October increased by 6.9 per cent year-on-year, the seventh consecutive month of growth, driven by resilient export demand and the government-led infrastructure drive. The demand side recovery has been much slower, with retail sales declining on a year-on-year basis for much of 2020 prior to the 0.5 per cent increase recorded in August. Retail sales increased by 4.3 per cent in October, as household discretionary spending recovered.

Chinese exports have been resilient throughout 2020, propped up in the first half of the year by strong export demand for medical goods. In later months, Chinese export demand has benefited from recovering global consumer demand, with November customs data showing that Chinese exports grew by 21 per cent year-on-year. This growth was largely driven by increasing demand for electronic goods and work-from-home equipment. Chinese imports rose by 4.5 per cent in November, as Chinese household demand recovered. Chinese imports of resources and energy commodities were buoyant throughout 2020, as China capitalised on low prices to import key resources and energy products, notably oil and gas.

The IMF is forecasting the Chinese economy to grow by 1.9 per cent in 2020, making it one of the few economies where economic growth is anticipated. Chinese economic growth is expected to recover to 8.2 per cent in 2021, before moderating to 5.8 per cent in 2022.

The US economy faces a delayed recovery from COVID-19 The US economy grew by a record 7.4 per cent in the September quarter. This followed a 9.5 per cent decline in the June quarter, which was the largest decline on record. Despite the record growth rate in the September quarter, economic activity remains 3.5 per cent below the December 2019 quarter. Ongoing services sector impacts are likely to weigh on the economic recovery, as will high COVID-19 case numbers.

President-elect Biden has signalled an intention to make some large shifts in US policy priorities once he takes office. These include an intent to re-join the Paris Climate Accord and to shift trade policy. If these shifts are

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made, they could materially affect global mineral demand, particularly in the medium to long term.

US COVID-19 cases have recently hit fresh highs, with significant variation in case numbers and in the level of restrictions across regions. Even in the states where COVID-19 containment measures have eased rapidly, economic harm caused by behavioural responses to the virus is ongoing.

In October, industrial production grew by 1.1 per cent month-on-month, but remains 5.6 per cent below the February level. Manufacturing output rose by 1.0 per cent in August, but was 6.7 per cent lower than in February. The US unemployment rate declined to 6.7 per cent in November, after peaking in April at a record high 15 per cent. Unemployment remains significantly higher than before the COVID-19 pandemic, as does the number of people filing for unemployment benefits (Figure 2.5). Employment has fallen starkly in the services sector, particularly in the leisure and hospitality and retail trade sectors. Reduced service sector employment is likely to push down US consumer demand for 2020 and 2021, particularly for large consumer durables.

Figure 2.5: US initial jobless claims and unemployment rate


The US government has introduced around US$3 trillion worth of stimulus to address the impacts of COVID-19. The largest package was signed in late March, and committed US$2 trillion for household payments, support for local and state governments, and financial assistance for large businesses, including aircraft producers and airlines. Negotiations for further fiscal stimulus are ongoing as of 8 December 2020, as the number of new COVID-19 cases has surged and containment measures are reintroduced in many states. The size and timing of any further fiscal stimulus packages remains uncertain.

The persistence of the COVID-19 pandemic in the US — and consequent concerns for US economic growth — has seen the US dollar depreciate sharply since June 2020. The lower US dollar has given support to commodity prices.

The IMF forecasts the US economy to grow by 3.1 per cent in 2021 and 2.9 per cent in 2022.

EU government stimulus to drive economic recovery Eurozone GDP in the September quarter increased by 13 per cent quarter-on-quarter, following a 12 per cent decline in the June quarter (Figure 2.6). Despite the strong September quarter reading, economic activity remains 4.3 per cent lower year-on-year, and is 8.7 per cent lower in Spain, 5.8 per cent lower in Germany and 4.3 per cent lower in France. The ongoing economic recovery is likely to be constrained by rising COVID-19 cases and the subsequent tightening of containment measures in the December quarter.

Since August 2020, Eurozone COVID-19 cases have risen rapidly and have recently surpassed the peak case numbers from April. As a result, various EU member state governments have re-introduced containment measures in the December quarter. Thus far, these measures remain relatively targeted, potentially lowering the impact on economic activity.

Eurozone industrial production in September declined by 0.4 per cent on a monthly basis, following the 0.6 per cent increase in August. Although industrial production has generally increased in recent months, these

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gains have not yet reversed the declines from earlier in 2020, with industrial production in September still down by 6.8 per cent year-on-year. Germany, a key manufacturing country in Europe, registered an annual 8.7 per cent decline in industrial production in the year to September.

Forward looking indicators suggest that manufacturing activity is recovering. The Eurozone manufacturing PMI declined to 53.8 in November, and has been denoting month-on-month expansion since July. Although the manufacturing sector expansion is likely to be somewhat affected by the introduction of fresh COVID-19 containment measures, the largest impacts are likely to be felt in the Eurozone services sector.

The services PMI was 41.7 in November, down from 46.9 in October. The hospitality and retail sectors have been affected by tightening containment measures and household behaviour responding to escalating COVID-19 case numbers. With fresh containment measures coming into effect throughout October and November, the Eurozone services sector will likely contract in the December quarter.

Figure 2.6: Eurozone GDP and Composite PMI


In July 2020, European Union members agreed to a fiscal stimulus package totalling €750 billion, to address the economic impacts from the COVID-19 pandemic. This package consists of €390 billion worth of grants and €360 billion of low-interest loans. Almost a third of this €750 billion is earmarked for climate initiatives consistent with Paris Agreement targets.

These fiscal policies have been accompanied by expansionary monetary policy, with the European Central Bank keeping interest rates at negative levels throughout 2020. Furthermore, in March 2020, the central bank introduced a pandemic emergency purchase programme that targets securities, and ramped up their quantitative easing programme introduced in 2019. These programs were later increased in both size and duration. The outcome of ongoing Brexit negotiations will have implications for EU and UK growth.

The IMF forecasts that the Eurozone economy contracts by 7.6 per cent in 2020. Economic growth is forecast to be 5.0 per cent in 2021, and 3.3 per cent in 2022. However, these IMF forecasts were finalised before COVID-19 containment measures were re-introduced in October, so are likely to be revised lower.

Japanese GDP is set to fall despite significant fiscal stimulus measures Japanese GDP in the September quarter rose by a record 5.0 per cent quarter-on-quarter. This follows a fall of 8.2 per cent in the June quarter. Economic recovery in September was largely driven by a 4.7 per cent increase in private consumption, with retail sales rebounding as containment measures were relaxed and citizens spent government issued stimulus checks. Exports also increased, as global automobile demand recovered, and a shift towards working from home in many economies boosted semi-conductor exports. However, capital expenditure fell by 3.4 per cent from the June quarter, suggesting business confidence remains subdued. The IMF expects Japan’s economy to contract by 5.3 per cent in 2020. -15

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Figure 2.7: Japanese industrial production and machinery orders


In response to the downturn, the Japanese government has introduced further fiscal stimulus measures, building on the December 2019 package (which pre-dated the COVID-19 pandemic). Following the resignation of Prime Minister Abe in August 2020, new Japanese Prime Minister Suga is looking to introduce a new fiscal package to stimulate economic activity.

The Japanese manufacturing PMI increased marginally to 49.0 in November, although it still suggests a month-on-month contraction. In October, Japanese industrial production increased by 3.8 per cent month-on-month, driven by vehicle production. Despite the strong growth, industrial production remained 3.2 per cent lower year-on-year.

The IMF expects the Japanese economy to grow by 2.3 per cent in 2021. Growth is then expected to moderate to 1.7 per cent in 2022.

‘Zoom Boom’ supporting South Korean exports and income South Korean economic activity increased by 2.1 per cent quarter-on-quarter in the September quarter, although it remains 1.3 per

cent lower year-on-year. The economic recovery has been driven by significant fiscal stimulus and a 16 per cent quarter-on-quarter increase in exports. Trade has grown due to the ‘Zoom Boom’ that has increased demand for remote working equipment, benefitting South Korean exports of semi-conductors and electronic goods. The IMF expects the South Korean economy to contract by 1.9 per cent in 2020.

The South Korean manufacturing PMI increased to 52.9 in November, the highest reading since February 2011. Industrial production in October was unchanged month-on-month, but was 2.7 per cent lower year-on-year. Manufacturing output declined by 1.3 per cent month-on-month, while services output increased by 1.2 per cent.

In 2019, heightened trade tensions between South Korea and Japan disrupted regional supply chains, affecting both economies. These tensions appeared to be easing in late 2019 and early 2020. However, in June 2020, the South Korean government announced that it was re-opening its WTO complaint against Japan. A renewal of South Korean-Japan trade tensions could pose risks to economic activity in both nations.

The IMF forecasts that the South Korean economy will grow by 2.9 per cent in 2021 and 3.1 per cent in 2022.

Rising COVID cases and resulting containment measures affecting India Indian GDP increased by 23 per cent in the September quarter, following the record contraction of 30 per cent in the June quarter (Figure 2.8). This economic recovery was driven by higher consumer spending and capital investment. The IMF is forecasting the Indian economy will contract by 10 per cent in 2020.

Indian economic activity fell by more than other emerging economies in the June quarter, largely due to stringent COVID-19 containment measures and relatively limited fiscal and monetary policy relief. In April 2020, the Indian government introduced containment measures including a three week lockdown, which was extended until 30 June for some areas. Following 30 June, state governments have introduced their own

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containment measures, creating disparities across regions. In recent months, some localised restrictions have persisted, although containment measures have generally eased. The Indian government has been limited in its scope for fiscal stimulus due to high debt levels.

The scope for interest rate cuts is also constrained, due to a string of previous interest rate cuts in 2019, which aimed to address illiquidity in the financial sector. With food prices already soaring, there are concerns that additional interest rate cuts could stoke inflation. These inflationary concerns are in contrast to most other economies, where inflation remains relatively low despite widespread monetary stimulus.

The Indian manufacturing PMI declined to 56.3 in November, but remained at values suggesting expansion for the third consecutive month. The series suggests strong increases in aggregate new orders, new export orders and output.

The IMF expects Indian GDP to grow by 8.8 per cent in 2021 and 8.0 per cent in 2022.

Figure 2.8: Indian GDP growth


Implications of recent net-zero announcements for Australia uncertain In September 2020, China’s Premier announced a net-zero target before 2060. In October, Japan’s new Prime Minister and South Korea’s President committed to net-zero emissions by 2050. These announcements — by Australia’s three largest energy export markets — mark a significant shift in the climate ambitions of these countries.

Substantial uncertainty remains over the policies and plans which will be used to achieve these targets, with more clarity likely to emerge in the coming year. China is finalising its 14th Five Year Plan (2021-2025), which is expected to place climate change at the centre of policy making. The plan will align with China’s long-term strategy, due to be submitted ahead of the COP26 climate change conference in November 2021. Japan’s revised Strategic Energy Plan, expected to be released in mid-2021, will likely encompass stronger efforts to reach a lower-emission energy mix by 2030. South Korea is scheduled to release a revised energy policy for 2020-2034 and a low-emissions development strategy by the end of 2020.

China, Japan and South Korea together accounted for 74 per cent of Australia’s thermal coal exports and 87 per cent of Australia’s LNG exports in 2019–20. However, the implications for Australian coal and gas remain uncertain given the long time horizons and lack of clarity surrounding the policy details. While pre-existing policies enacted by major trading partners have been factored into the current forecasts for thermal coal and gas, most impacts will likely occur beyond the two-year outlook contained in this edition of the Resources and Energy Quarterly.

Investment in coal and gas projects has weakened in recent years, but challenging market conditions have also contributed to this trend. Gas is expected to play an important role as a bridging fuel in the global energy transition (see the gas chapter). However, thermal coal is likely to be more negatively affected, with recent policies accelerating the phase out of coal in Japan and South Korea (see the thermal coal chapter).

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Table 2.1: Key IMF GDP assumptions

2019 2020a 2021a 2022a

Economic growthb

Advanced economies

1.7

-5.8

3.9

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– Australia 1.8 -4.2 3.0 2.8

– Eurozone 1.7 -7.6 5.0 3.3

– France 1.5 -9.8 6.0 2.9

– Germany

– Japan

– New Zealand

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– United Kingdom

– United States

Emerging economies

– ASEAN-5d

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– Chinae 6.1 1.9 8.2 5.8

– India 4.2 -10.3 8.8 8.0

– Latin America 0.1 -8.1 3.6 2.7

– Middle East 1.3 -4.1 3.0 4.0

Worldc 2.9 -4.4 5.2 4.2 Notes: a Assumption; b Year-on-year change; c Calculated by the IMF using purchasing power parity (PPP) weights for nominal country gross domestic product; d Indonesia, Malaysia, the Philippines, Thailand and Vietnam. e Excludes Hong Kong. Sources: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020); IMF (2020)

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Table 2.2: Exchange rate and inflation assumptions

2019 2020a 2021a 2022a

AUD/USD exchange rate 0.70 0.69 0.75 0.75

Inflation rateb

United States 1.8 0.9 1.7 2.0 2018–19 2019–20 2020–21a 2021–22a

Australiae 1.6 1.3 0.9 1.7 Notes: a Assumption; b Change from previous period; c Calculated by the IMF using purchasing power parity (PPP) weights for nominal country gross domestic product; e Average of daily rates. Sources: ABS (2020) Consumer Price Index, 6401.0; Bloomberg (2020); Department of Industry, Science, Energy and Resources; RBA (2020) Reserve Bank of Australia Bulletin.


3.1 Summary World steel consumption is expected to have declined by 2.2 per cent in

2020, due to the COVID-19 pandemic and resulting economic downturn. Stimulus in China has prevented a much worse overall result, though steel demand remains low in many countries.

World steel consumption is forecast to rebound as the global economy recovers, growing by 3.8 per cent in 2021 and by 3.6 per cent in 2022.

Steel output is forecast to follow a similar trend, falling by 2.0 per cent in 2020 before rising by 3.0 per cent in 2021 and 3.6 per cent in 2022 as steel smelters move back towards normal production levels.

3.2 World consumption and production Steel production is likely to be robust in 2020

Global steel production has now completely reversed the falls of early 2020, with aggregate monthly production now above the levels of late 2019. However, this trend conceals a drastic shift in market structure, with historically high output in China acting as an offset for countries where steel output remains at recessionary levels. Many steel smelters remain closed or on standby around the world.

Steel demand has been supported by rising automotive sales and by an easing in COVID-19 restrictions in some countries. It is expected that conditions for steel demand will lift further over the next six months, supported by global economic recovery and rising consumer demand.

China’s monthly steel production in September is running at almost 40 per cent above the level of September 2019. This has placed the country in a position of unprecedented dominance in steelmaking globally, with numerous other countries continuing to face manufacturing and steelmaking recessions.

Despite growing domestic production, steel inventory in China has come under pressure, with traders’ and mill’s finished inventory in decline at the end of 2020. This suggests production is being driven by direct consumption, rather than efforts to ramp up in preparation for further

Figure 3.1: Steel production, monthly change

Notes: Monthly average for integrated basic oxygen furnace (BOF) steel mills Source: Bloomberg (2020) China BOF Steel Profit Index

Figure 3.2: Steel production by region

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

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stimulus measures. Construction activity remains strong in China, with warmer temperatures and more rapid approvals for infrastructure projects supporting building efforts.

In contrast, European steelmaking has been slow to recover. The steel sector in Europe was already facing difficult conditions prior to the COVID-19 pandemic, with issues including growing trade disputes, ineffective EU anti-dumping policies, and lingering uncertainty around Brexit. Over the longer term, European steelmaking has faced decline over decades as a result of persistent price competition from subsidised steelmakers in China. A perfect storm of long-term and short-term issues over the last year led to unprecedented workforce reductions and production cuts in late 2019 and early 2020. A number of smelters remain shut down across Europe.

In Brazil, steelmaking continues to face tough conditions, and is expected to fall by around 6 per cent in 2020 relative to 2019. However, this is a less severe fall than had been expected by most analysts in the early part of 2020.

Steelmaking in Japan remains in recession, with monthly output running at 20 per cent below its level of a year ago. Part of this cut may become permanent should some steel plants fail to reopen.

India’s steel production has largely recovered to its pre-COVID level, with September output running at around 95 per cent output from September 2019. However, the Indian Government’s ambitious targets to expand its domestic steel output were delayed by the COVID–19 pandemic, which forced workers to stay offsite and disrupted transport infrastructure including ports and rail.

Recovery has also proven uneven among the different forms of steel. A recovery in global manufacturing is driving a shift towards hot-rolled coil, which is expected to dominate growth in steel output in the December quarter. Demand for rebar steel is expected to grow more slowly, with more limited price pressure over the coming months.

Figure 3.3: Steel consumption growth by region


Figure 3.4: Steel production growth by region


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China is likely to retain its dominance over global steel markets

Steel demand is likely to remain strong in China into 2021, supported by infrastructure development and housing construction, which has in turn been supported by relatively low interest rates.

The Chinese government will release its fourteenth Five-Year Plan (covering 2021-2025) in March 2021. The plan has major implications for China’s steel industry, and is expected to include a renewed focus on infrastructure rollouts and more rapid urbanisation, particularly in central and western China.

China’s government is examining more rapid consolidation of its domestic steel sector. The merger of small and mid-sized companies with larger steel makers will see inefficient mills shut and larger companies gain greater power over pricing and market conditions. The result will likely be a more centrally planned industry, with internal coordination and more pricing heft.

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

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

Growth elsewhere is expected to remain modest, with rebalancing slow Steelmaking outside China is showing signs of recovery, led by growth in other Asian countries. South Korean production has recovered to around pre-COVID levels, with new facilities and upgrades expected to provide a further modest lift by the end of the outlook period.

India’s steel production has shown solid growth in recent months, but it is not yet clear how rapidly its long-held plans to expand domestic steel production can proceed in light of COVID-19 disruptions and the unusually high iron ore price, which affects the viability of proposed steel plants. Elsewhere, growth appears to be picking up in Myanmar and Estonia, where production is expected to keep expanding, albeit from a relatively low base.

However, production in Europe is not expected to fully recover, with some steel mills expected to close permanently. This will result in the acceleration of a long-running shift in steel production towards emerging economies across southern and eastern Asia, with Vietnam in particular expected to increase its output as new steel projects are completed.

There may also be new forms of steelmaking emerging over coming years. Carbon abatement goals have resulted in growing interest in ‘green steel’, with estimates from the World Steel Association suggesting that the steel sector currently accounts for around 8 per cent of global carbon emissions. A shift towards scrap-based steel production — already underway in China — is likely to gather speed over the next few years. Interest is also growing in zero-carbon steel production, notably through Green Hydrogen Ironmaking. This technique substitutes hydrogen for carbon in blast furnaces, thereby avoiding the release of carbon dioxide emissions. A number of pilot projects for this technology are now underway, with the biggest trial set to occur in Sweden.

Should this or similar technology become commercial, there may be substantial shifts across the steel supply chain over the coming decades. Such a change would provide significant opportunities to any global steelmaker able to draw capital and develop new technology.

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Table 3.1: World steel consumption and production Million tonnes Annual percentage change

Crude steel consumption 2019 2020e 2021f 2022f 2020e 2021f 2022f

China 875 892 918 942 2.0 2.8 2.7 European Union g 180 162 159 157 -10.3 -1.4 -1.4 United States 112 111 113 116 -1.3 2.2 2.2 India 106 99 106 113 -6.8 7.2 6.6 Japan 71 66 65 64 -7.6 -1.5 -1.5 Russia 56 53 53 52 -4.7 -1.2 -1.2 South Korea 45 43 42 42 -3.5 -1.7 -1.7 Brazil 25 23 24 25 -5.7 2.9 2.8 World steel consumption 1840 1799 1868 1935 -2.2 3.8 3.6 Crude steel production 2019 2020e 2021f 2022f 2020e 2021f 2022f China 993 1 054 1 067 1 101 6.2 1.2 3.2

European Union 148 123 124 125 -16.7 0.4 0.5

India 99 79 82 81 -19.9 3.0 -1.0

Japan 111 96 103 112 -13.4 7.2 8.3

United States 88 70 70 70 -19.8 0.1 0.1

Brazil 72 71 72 72 -1.1 0.9 1.1

Russia 71 67 72 73 -6.4 7.1 1.3

South Korea 32 31 31 31 -5.4 0.1 0.1

World steel production 1843 1806 1860 1927 -2.0 3.0 3.6

Notes: e Estimate; f Forecast; g European Union 27 encompasses the aggregate output and demand for the 27 states which comprise the European Union.

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

34


4.1 Summary The iron ore price has risen sharply in recent months, supported by

robust demand in China linked to government stimulus measures. The iron ore price is expected to remain well above US$100 a tonne until mid-2021 before easing to just over US$75 by the end of 2022.

Australian export volumes are expected to grow from 858 million tonnes in 2019–20 to 906 million tonnes by 2021–22 as mines open or expand in Western Australia (see Australia section).

Stronger prices are expected to push Australia’s iron ore export values up to a peak of $123 billion in 2020–21. An easing in prices and stronger Australian dollar are subsequently expected to push earnings back to a still strong $95 billion by 2021–22.

4.2 Prices Iron ore prices remain strong due to supply disruptions Iron ore prices surged in mid-2020 as a result of growing Chinese demand and ongoing disruptions to Brazilian supply. Subsequently, prices have held up at high levels, moving up again in recent weeks (Figure 4.1).

Slight growth in Brazilian supply has led to some reduction in the price premium for higher grades (Figure 4.2). The price premium has also been curbed by a seasonal slowdown in construction across China, though Chinese construction remains strong overall, and seasonal effects are likely to be temporary.

Iron ore prices have proven highly sensitive to movements in demand over 2020. Prior to 2020, many large iron ore miners cut back investment, closed mines, and attempted to retire debt. This left the industry without substantial spare capacity, magnifying the impact of supply disruptions and recent growth in Chinese steel use. With China continuing to direct substantial spending towards investment in infrastructure and property, domestic steel stockpiles are now being run down. This is likely to keep pressure on prices over the short term, even though many steel mills in other parts of the world are yet to return to full production.

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

Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Source: Bloomberg (2020) Antaike iron ore port stocks and Metal Bulletin

Figure 4.2: Iron ore price spread between grades

Notes: *Benchmark used is 62 per cent iron fines CFR Source: Bloomberg (2020) China import prices

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Iron ore prices are likely to stay robust into 2021 Prices are expected to remain strong for the next six months. China’s demand is expected to remain high, though China’s steelmakers may seek to modestly reduce production should prices remain at a level which renders many of them unprofitable (see Figures 4.3 and 4.4). Demand in many other countries is expected to remain below its 2019 level: a range of steelmakers in Europe and South Asia remain on hiatus or shut down, and are not expected to return to production until iron ore prices drop.

Prices have been held up by a combination of production constraints in Brazil, ongoing stimulus-driven demand in China, and the relatively low price of metallurgical coal, which gives steelmakers added flexibility to pay more for iron ore. These factors are likely to persist for at least another six months. On December 2, Vale released an update to its guidance, which reduced its expected output for 2020 from 310-330 million tonnes to 300-305 million tonnes. This will add significantly to supply pressures over the coming year, with demand likely to be met through drawdown of inventories, a potential restart of currently closed mines in China, or a lift in high-cost production from India. Persistently strong prices will likely be needed to bring sufficient supply to the market.

Prices will also be supported by recovery in the global economy, and a linked recovery in steel production outside of China. A substantial amount of steelmaking capacity remains shut down across much of the world, but many of these plants have retained their workforce and are capable of a rapid power-up should it become profitable for them to do so. With global steelmaking now more China-centred than ever before, many governments may seek to ensure their domestic capacity is not permanently lost, while governments seeking rapid expansion in their domestic industries (such as India) may wish to ensure that such plans are not delayed for too long by COVID–19.

Risks remain evenly split in both directions. China’s dominance in iron ore consumption gives it considerable capacity to set global prices, though the relative concentration of the iron ore supply chain may act as a counter-balance. Any easing in Chinese stimulus measures will also lead to

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

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

Figure 4.4: Iron ore price vs China steel production growth

Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Source: Bloomberg (2020) China import prices; World Steel Association (2020)

0

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2,000

3,000

4,000

5,000

0

30

60

90

120

150

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Ren

min

bi a

tonn

e

US$

a to

nne

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

0

30

60

90

120

150

-10

-5

0

5

10

15

2015 2016 2017 2018 2019 2020

US$

a to

nne

Year

-on-

year

per

cen

t cha

nge

China steel production Iron ore price (rhs)

36


fairly rapid downward shifts in prices from the current forecast level.

On balance, it is expected that prices will remain above US$100 a tonne until mid-2021, before easing gradually to around US$75 by the end of 2022 as Brazilian supply recovers and Chinese stimulus eases back (see Figure 4.5).

Figure 4.5: Iron ore price outlook, quarterly

Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Source: Bloomberg (2020) Department of Industry, Science, Energy and Resources (2020)

4.3 World trade Brazilian iron ore supply is recovering

China has become steadily more dominant as a global iron ore destination, with steel production in a range of other countries subject to recessionary conditions in the latter half of 2020. China now accounts for more than 70 per cent of global iron ore imports, though its power to set prices has been somewhat checked by the relative market concentration among iron ore producers. Most Chinese imports come from three large companies: BHP, Vale, and Rio Tinto. Of these three, BHP and Rio Tinto remain on track to meet their

previous guidance for output in 2020, and are expected to produce 324-333 million tonnes and 276-286 million tonnes (respectively).

However, output from Vale remains under pressure, as previously noted. In November, the company announced that 33 of its 104 Brazilian dam structures had failed stability assessments, with nearly all of the affected dams connected to iron ore facilities. The company remains subject to a range of legal actions, added regulatory processes and other requirements in the wake of the Brumadinho Dam collapse in 2019. The COVID-19 pandemic also led to significant disruptions of port and rail facilities in the south of Brazil, adding further logistical difficulty.

The company did achieve significant milestones across its southern operations in the second half of 2020, with shipments rising from 64 million tonnes in the June quarter to 82 million tonnes in the September quarter. However, this has not been sufficient to enable the company to meet its initial production guidance for 2020.

The longer term outlook for Vale is stronger, with the company making significant progress on its US$1.5 billion Serra Sul 120 project, expected to be completed by 2024. This upgrade will open access to additional mining areas, incorporate extra processing lines and provide a duplicate long-distance conveyor. Mine plant capacity is expected to expand by 20 million tonnes a year, allowing Vale to maintain its productive capacity as new production and licencing restrictions affect its output adversely.

With Vale’s output set to recover over time, the three largest iron ore producers remain in a dominant market position, with the relative lack of competition and high entry barriers somewhat moderating China’s power to set prices in the market. In response, China has stepped up its effort to source alternative supplies during 2020.

By far the largest prospective alternative mine is at Simandou in the Nzérékoré region of Guinea. In recent months, China has stepped up efforts to develop the project, which has potential to extract 70-150 million tonnes of iron ore a year (depending on whether both the northern and southern blocks can be brought into production). This would represent a

0

50

100

150

2015 2016 2017 2018 2019 2020 2021 2022

$US/

tonn

e

Price - 62% fines

37


large new source of seaborne iron ore, though the market impact would be somewhat limited given the scale of the overall seaborne market (where supply is rising towards 2 billion tonnes a year).

The Simandou deposit is subject to complex ownership arrangements. The southern blocks of Simandou are controlled by a joint venture between Rio Tinto and Chinalcom, while much of the northern area is controlled by a separate Chinese joint venture, which has recently announced plans to push ahead with its project.

The project faces significant logistical issues. Rio Tinto has estimated that project infrastructure costs are likely to exceed US$20 billion. The project will require about 650 kilometres of new railway, which would cut through mountainous and inaccessible regions. The profitability for the mine would be somewhat clouded by the fact that any significant price falls brought about by the project would reduce profitability of other Rio Tinto facilities around the world.

Overall, it is not expected that production at Simandou will occur within the next five years, and potentially longer. Little progress has been made over the past 10 years, and a large quantity of complex infrastructure will need to be built.

One new iron ore mine has recently received formal approval to proceed, with Champion Iron’s Bloom Lake expansion in Canada now expected to be completed in December 2022. This would almost double output from the site to 15 million tonnes annually from 2023.

In aggregate, demand for iron ore remains strongly China-centred, with Chinese steel blast furnaces continuing to operate at above-normal capacity. Much of this output is being used in building infrastructure, with the Chinese government progressing with plans for new bridges, rail, and subway lines. Steel production has also recovered somewhat in India and South Korea, creating the possibility of a more diverse and broadly based steel market in 2021.

Chinese demand for iron is likely at its peak, with a decline expected over the next 10 years as a growing share of its steel production is drawn from

domestic recycling. This will result in reduced Chinese dependence on the seaborne iron ore market.

While demand continues to evolve, iron ore supply is expected to remain broadly unchanged in its structure, with Australia continuing to play a dominant role (Figure 4.6).

Figure 4.6: Outlook for global iron ore exports

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

4.4 Australia Iron ore export earnings are set to reach a new record in 2020–21

Australian iron ore export values set a new record of $10.9 billion in October. This is more than one third higher than the total for October 2019. The bulk of this growth is made up of Chinese imports from Australia, which have risen strongly in recent months. The refurbishment of a railcar dumper at BHP’s Port Hedland facilities is expected to help the company meet this demand into 2021, with the conclusion of site

0

200

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1,200

1,400

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2015 2016 2017 2018 2019 2020 2021 2022

Milli

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Australia Brazil ROW

38


maintenance at Rio Tinto facilities also expected to support exports over the December quarter.

A new mine is set to open in the Pilbara, where Strike Resources has announced the completion of a feasibility study into its Paulsens East project. This mine is expected to produce an initial output of about 6 million tonnes over four years, with the study finding low technical risks and robust economics given the relatively high quality of output and the current price environment. First production from the site is targeted for mid-2021.

Overall trends for investment in iron ore can be viewed in the 2020 Resources and Energy Major Projects publication.

Australia’s iron ore export volumes are forecast to grow Export volumes are expected to increase from 858 million tonnes in 2019–20 to be above 900 million tonnes by 2021–22 (see Figure 4.7). Output is expected to grow from several expanding projects in the Pilbara region. Prices are expected to remain strong over the outlook period, with export earnings expected to peak at $123 billion in 2010–21 before easing to $95 billion by 2021–22. However, exports will remain sensitive to conditions in China, which remains our dominant market (Figure 4.8).

Iron ore exploration expenditure is growing as prices lift Iron ore exploration has picked up in recent quarters as prices have lifted. A total of $111 million was invested in exploration in the September quarter. This is around 8 per cent higher than in the September quarter 2019, and reflects favourable prices in the first half of 2020-21.

Revisions Forecast export earnings for 2020–21 have risen considerably, from $97 billion in the September Resources and Energy Quarterly to just over $120 billion in this edition. This results from a stronger than expected Chinese demand and recent large cuts in Vale’s production guidance, which will likely lead to a supply shortfall and significantly higher prices over the year. Earnings have been revised up for 2021–22, though to a lesser degree.

Figure 4.7: Australia’s iron ore export volumes and values

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

Figure 4.8: Australia’s iron ore export destinations

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

0

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2009–10 2012–13 2015–16 2018–19 2021–22

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illion

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Volume Value (rhs)

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Sep-96 Sep-00 Sep-04 Sep-08 Sep-12 Sep-16 Sep-20$m

(mon

thly

)

Japan Korea Taiwan China Others

39


Table 4.1: World trade in iron ore

Million tonnes Annual percentage change

2019 2020e 2021f 2022f 2020f 2021f 2022f

Total world trade 1,555 1,647 1,783 1,861 6.0 8.2 4.4

Iron ore imports

China 1,071 1,209 1,343 1,421 13.0 11.0 5.8

European Union

Japan

South Korea

137

120

74

128

98

69

125

101

74

125

100

75

-7.0

-18.3

-6.4

-2.2

3.2

7.1

0.0

-1.0

1.3

India 5 5 5 5 -6.5 -2.1 0.0

Iron ore exports

Australia 836 876 896 923 4.9 2.3 3.0

Brazil 336 269 281 301 -20.1 4.5 7.1

Ukraine 44 50 62 64 12.9 24.0 3.2

India 40 52 62 65 28.2 21.3 3.6 Notes: e estimate; f forecast Source: World Steel Association (2020); International Trade Centre (2020); Department of Industry, Science, Energy and Resources (2020)

40


Table 4.2: Iron ore outlook

Annual percentage change

World Unit 2019 2020e 2021f 2022f 2020f 2021f 2022f bcPrices

– nominal US$/t 81.5 93.1 100.0 76.3 14.2 7.4 -23.7

d – real US$/t 82.6 93.1 98.0 73.2 12.8 5.3 -25.3

Australia Unit 2018–19 2019–20 2020–21f 2021–22f 2019–20e 2020–21f 2021–22f

Production

hs – Steel Mt 6.05 5.48 5.49 5.52 -9.5 0.3 0.6

– Iron ore Mt 924 919 929 930 -0.6 1.1 0.1

Exports

Steel Mt 1.21 0.88 0.90 0.95 -27.6 2.3 5.9

– nominal value A$m 1 287 1 010 833 861 -21.6 -17.5 3.4

– real value hi A$m 1 316 1 019 833 847 -22.6 -18.3 1.7

Iron ore Mt 818 858 899 906 4.9 4.7 0.7

– nominal value A$m 77,553 102,815 123,178 95,245 32.6 19.8 -22.7

– real value i A$m 79,291 103,732 123,178 93,685 30.8 18.7 -23.9

Notes: b fob Australian basis; c Spot price, 62 per cent iron content basis; d In 2020 US dollars; e Estimate; f forecast; h Crude steel equivalent; Crude steel is defined as the first solid state of production after melting. In ABS Australian Harmonized Export Commodity Classification, crude steel equivalent includes most items from 7206 to 7307, excluding ferrous waste and scrap and ferroalloys; i In 2020–21 Australian dollars. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Bloomberg (2020) Metal Bulletin; World Steel Association (2020); AME Group (2020); Company Reports; Department of Industry, Science, Energy and Resources (2020)

43


5.1 Summary Metallurgical coal prices have been volatile in the December quarter,

rebounding on hopeful signs in world industrial activity, then falling to four year lows on a slow-down in China’s imports. The Australian premium hard coking coal (HCC) price is estimated to average US$125 a tonne in 2020, down from US$179 a tonne in 2019.

Australia’s exports are forecast to fall by around 8 million tonnes to 169 million tonnes in 2020–21, due to lower global demand. Exports should lift in 2021–22, as world steel production recovers further (see Australia section).

Australia’s metallurgical coal exports values are forecast to fall sharply to $22 billion in 2020–21, from $34 billion in 2019–20. They are forecast to recover partially to $27 billi

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