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Outlook for Australian Resources and

Energy Commodities

John Barber

Bureau of Resources and Energy Economics

bree.gov.au

Overview

1. The importance of the mining sector to the Australian

economy – now and into the future.

2. The mining boom, where to from here?

3. Outlook for commodities.

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Mining strong in Q1 2014

-0.5 0 0.5 1 1.5

Mining

Financial and insuranceservices

Construction

Manufacturing

Professional, scientific andtechnical services

Contribution to growth, selected industries: Mar 13 to Mar 14

Source: ABS Cat 5206.

The mining sector

accounts for around 10%

of Australia’s GDP.

The Australian economy

expanded 1.1% in the

March quarter and 3.5%

year-on-year (seasonally

adjusted), driven largely by

net exports.

The mining sector

contributed about 80% of

the growth in GDP during

the quarter.

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Demographic Shift:

Australia’s Population Distribution 2013

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

0 4 8

12

16

20

24

28

32

36

40

44

48

52

56

60

64

68

72

76

80

84

88

92

96

100

No. People

Peak spending age

Peak in housing expenditure

Retirement

Lower income

Sell house

Lower consumption

First home buying

Source: ABS, Dent Research

The next

demographic

trough

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Gross Value Add Per Unit of Labour

0

100,000

200,000

300,000

400,000

500,000

600,000

A$

The Australian mining sector produces the best return on labour in the country. 2% of the

workforce generates 10% of GDP!

Each worker employed in the mining sector generates on average around $515,000 for the

economy.

As the Australian population ages, returns on labour will become increasingly important.

Source: ABS

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The Mining Boom

1. Elevated Prices

2. Increased Investment

3. Higher Output

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Commodity Prices

0

100

200

300

400

500

600

700

Index Mar 00 = 100

Copper Aluminium Iron ore Thermal Coal

High price growth phase Prices decline

China joins WTO

GFC

Source: ABS, LME

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Investment in Australian Resources

Sector

1. Significance of the past decade

2. Outlook for future investment

3. Impact of cost cutting

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Comparative Project Costs

0

10

20

30

40

50

60

A$b

*Completed in the past 3 years

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50

100

150

200

250

300

20

40

60

80

100

120

Apr–04 Apr–06 Apr–08 Apr–10 Apr–12 Apr–14

number (left axis) value (right axis)

number

of

projects

A$b

Committed investment declining

Source: BREE Resources and Energy Major Projects Report, April 2014

As at end April there were

48 projects worth $229

billion.

This is 15 projects and $11

billion lower than the

previous six months.

Projects are moving from

the construction phase to

the production phase.

21 projects were

completed in the six

months to April 2014,

worth a combined $25.6

billion.

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Declining Capital Expenditure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

20

40

60

80

100

120

140

160

180

2007-08 2009-10 2011-12 2013-14

% A$b Australia – Capital Expenditure

Non-mining Mining % share mining (rhs)

ABS estimates Actual

Source: ABS cat no 5625

-$26b

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1

2

3

4

5

6

7

8

2003 2005 2007 2009 2011 2013

Petroleum Minerals

A$b

Exploration activity declining

Total exploration

expenditure declined

by 8% to $7.1 billion in

2013.

Higher petroleum

exploration was more

than offset by a

substantial decline in

minerals exploration.

Minerals exploration

expenditure has

declined for 6

consecutive quarters.

Source: ABS

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Outlook for Australia’s Commodity

Exports

1. Iron Ore – 600 million tonnes and growing.

2. LNG – set to become largest exporter in the world.

3. Total value of mineral and energy commodity exports to

grow to $200 billion in 2014-15, $250 billion in 2018-19.

So how is the ‘boom’ over?

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Medium term outlook for Australia’s resources

exports

40

80

120

160

200

240

280

Real A$b

energy resources

Growth in export values due to:

1. Higher volumes of bulk

commodities (iron ore and

coal)

2. Growth in LNG exports

3. Forecast more favourable

USD exchange rate.

Lower prices are forecast, which

will partially offset the increase

in volumes

Forecast total value of exports

in 2018-19 = $254 billion (in real

terms).

Source: ABS, BREE

Forecast

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Outlook for iron ore

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Iron Ore Price Cycle: Peaks and Troughs

0

40

80

120

160

200

Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014

US$/t

Peak

Trough

Peak Peak

Peak

Trough

Trough

Trough

Trough

Peak

Peak

Source: Bloomberg

Peaks and troughs are a common part of the iron ore price cycle.

But since early 2011, the trend has been for lower peaks.

Trough

Peak

Trough

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China Real Estate – Floor Space

Started and Sold*

-40%

-20%

0%

20%

40%

60%

80%

Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

Started Sold

*3mma %yr

Source: CEIC

Housing

downturn

GFC response

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China Fixed Asset Investment Growth*

-60%

-40%

-20%

0%

20%

40%

60%

80%

Mar,2012

Jun,2012

Sep,2012

Dec,2012

Mar,2013

Jun,2013

Sep,2013

Dec,2013

Mar,2014

Jun,2014

Rail Manufacturing Real Estate

* 3mma %yr

Source: CEIC

Spending on rail is a key driver of the Chinese steel

and iron ore cycles.

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China Steel Production

-10%

-5%

0%

5%

10%

15%

20%

25%

40

45

50

55

60

65

70

75

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

%yr Mt

Monthly Production (LHS) %yr (RHS)

Source: Bloomberg

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China Iron Ore Imports

-20%

-10%

0%

10%

20%

30%

40%

Year-on-Year % Change

0

20

40

60

80

100

Mt

Volume

Australia Brazil OtherSource: Bloomberg

Chinese New Year

data irregularities

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Australia’s iron ore export volumes - monthly

0

10

20

30

40

50

60

70

Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14

Mt

Trend line

Iron ore export volumes up 80% since April 2011!

Source: ABS

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Australia’s iron ore exports

20

40

60

80

100

200

400

600

800

1000

Real A$b Mt

volume value (right axis)

China’s steel industry expected

to continue growing, albeit at

lower rates.

Prices forecast to fall as more

supply from Australia and Brazil

enters the market.

Recent price falls not due to

lower demand. Iron ore prices

fluctuate with steel inventories.

Chinese government recently

announced fiscal packages to

continue urban development

that will support steel demand.

Source: ABS. BREE

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Outlook for Gas/LNG

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China – Forecast Gas Demand (by source)

China has many options

beyond 2020:

• coal/renewables/nuclear

• pipeline imports

• indigenous production

There are many potential

opportunities – and

roadblocks – to further growth

in LNG

Australian LNG can compete

by being cost competitive.

0

50

100

150

200

250

300

350

400

450

500

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Conventional production Shale/CBM

Other Pipeline Russian Pipeline

LNG

bcm

Source: Nexant; IEA; BREE

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Australia’s LNG exports

10

20

30

40

50

60

15

30

45

60

75

90

2008–09 2010–11 2012–13 2014–15 2016–17 2018–19

Real $Ab

Mt

volume value (right axis)

Export volumes to grow as new

projects come online.

Risk of schedule delays and gas

shortages for CSG projects.

Further onshore investment in

Australia is under pressure due

to rising costs. FLNG investment

still attractive but provides fewer

benefits to Australia in

construction phase.

US exports will have a major

impact on Asia-Pacific market,

especially prices.

Conflict in the Ukraine may result

in US LNG exports being

directed to Europe.

Source: ABS, BREE

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Thank you

John Barber

Senior Economist

Bureau of Resources and Energy Economics

john.barber@bree.gov.au

02 6243 7988

www.bree.gov.au