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Resources and Energy QuarterlySeptember Quarter 2014

Bureau of Resources and Energy Economics

bree.gov.au

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Acknowledgements

Individual commodity outlooks have identified BREE authors.

Cover image source: Shutterstock.

BREE 2014, Resources and Energy Quarterly, September Quarter 2014, BREE, Canberra, September 2014.

Commonwealth of Australia 2014

This work is copyright, the copyright being owned by the Commonwealth of Australia. The Commonwealth of Australia has, however, decidedthat, consistent with the need for free and open re-use and adaptation, public sector information should be licensed by agencies under theCreative Commons BY standard as the default position. The material in this publication is available for use according to the Creative CommonsBY licensing protocol whereby when a work is copied or redistributed, the Commonwealth of Australia (and any other nominated parties) mustbe credited and the source linked to by the user. It is recommended that users wishing to make copies from BREE publications contact theDeputy Executive Director, Bureau of Resources and Energy Economics (BREE). This is especially important where a publication containsmaterial in respect of which the copyright is held by a party other than the Commonwealth of Australia as the Creative Commons licence maynot be acceptable to those copyright owners.

The Australian Government acting through BREE has exercised due care and skill in the preparation and compilation of the information anddata set out in this publication. Notwithstanding, BREE, its employees and advisers disclaim all liability, including liability for negligence, for any

loss, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon any of the information or data setout in this publication to the maximum extent permitted by law.

ISSN 1839-499X (Print)

ISSN 1839-5007 (Online)

Vol. 4, no. 1

Postal address:Bureau of Resources and Energy EconomicsGPO Box 1564

Canberra ACT 2601 Australia

Email: [email protected]: www.bree.gov.au

bree.gov.au Resources and Energy Quarterly, September 2014 2

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ForewordThe Resources and Energy Quarterly provides data on theperformance of Australias resources and energy sectors andanalysis of key commodity markets. This edition of the Resourcesand Energy Quarterly contains an update to BREEs medium-termcommodity forecasts over the period to 2019. There are also two

articles discussing the potential growth path of electricity supply inemerging economies and a statistical review of the impact of themining boom on the Australian economy over the past decade.

The prospects for the resources and energy industry remain positive.Continued economic growth in highly populated emergingeconomies will sustain increased demand for both resources andenergy commodities into the future. Closer to home Australia ismoving decisively from the investment phase of the mining boom tothe production phase. We will continue to see expansions in capacityfrom the Australian resources and energy sectors with increasing

supply of iron ore and coal as well as the commencement of majornew LNG projects across Australia. First LNG shipments from theeast coast are expected to start by the end of 2014, rapidly rampingup over the period to 2019 to make Australia the worlds largest LNGproducer.

However, Australia is not alone in increasing production of resourcesand energy commodities. Global supply has grown significantly overrecent years with the prospect of further increases in supply over thenext few years. This has placed pressure on commodity prices in themedium term. Producers will need to focus on managing cost

pressures and improving their competiveness. However, it isimportant to note that this is not a new phenomenon for the

Australian industry which has shown considerable resilience overtime in the face of commodity price cycles in the past. Commodityprice cycles and changing economic conditions both domesticallyand globally have always been a part of the energy and resourcessectors.

BREE projects Australias earnings f rom resources and energycommodities to increase at an average rate of 7 per cent a year from201314 to total $274 billion in 201819.

Higher export earnings will be driven by the substantial growth involumes of a number of commodities despite near term softness inprices. In the short term, higher volumes of iron ore and coal will bethe principal drivers of export growth. As new LNG production

capacity comes online over the outlook period, LNG exports willincrease and make it one of Australias principal exports.

Wayne CalderDeputy Executive DirectorBureau of Resources and Energy Economics


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ContentsForeword 3

1. Macroeconomic outlook 5

2. Steel 21

3. Iron ore 31

4. Metallurgical coal 40

5. Thermal coal 45

6. Gas 56

7. Oil 65

8. Uranium 72

9. Gold 79

10. Aluminium 87

11. Copper 95

12. Nickel 102

13. Zinc 107

14. Fuelling the Future 112

15. The mining boomthe story so far 127

16. Trade summary charts and tables 136


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Macroeconomic outlook

The global economy

The global economy is forecast to grow by 3.5 per cent in 2014,driven by continued growth in emerging economies and improved

conditions in the United States. Emerging economies are forecast togrow by 4.6 per cent in 2014 and the OECD by 2.0 per cent (table1.1). China will continue to be a major driver of economic growth,albeit at a slower pace than in previous years, as the cyclicaldownturn in the housing sector acts as a drag on the economy. TheUS economic recovery continued to strengthen in early 2014 andkey economies in the EU, such as Germany and the UnitedKingdom, have recorded strong growth.

Over the medium term, world economic growth is assumed to rise to4.0 per cent, with growth in emerging and OECD economies

increasing to 5.3 per cent and 2.6 per cent, respectively. Growth inemerging economies is forecast to be driven by non-OECD Asianeconomies, particularly China, India and ASEAN. Improvingperformance in the US will be a major contributor to growth in theOECD along with a moderate recovery in the EU.

While the outlook is generally positive, there are a number of risks toglobal economic growth prospects over the short to medium term.These include the degree to which the tapering of the US FederalReserves quantitative easing (QE3) packages affects emergingeconomies through flow-on capital and currency effects and Chinas

ability to maintain economic momentum while transitioning to apattern of lower, more sustainable growth. The successfulimplementation of Chinas reform agenda to achieve these goals willbe a key risk to both Chinas economic prospects and that of itsmajor trading partners.

A more detailed discussion on the economic outlook for keyeconomies follows.

-1

1

2

3

4

5

6

1999 2003 2007 2011 2015 2019

%

Figure 1.1: World economic growth

Sources: IMF; BREE.

1

2

3

4

5

6

7

8

China Japan South Korea India United States

%

Figure 1.2: Economic growth in selected economies

2013 2015 2017 2019

Sources: IMF; BREE.


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Table 1.1: Key world macroeconomic assumptions

% 2013 2014 a 2015 a 2016 a 2017 a 2018 a 2019 a

Economic growth bOECD 1.3 2.0 2.4 2.5 2.6 2.6 2.6

United States 1.9 2.1 3.0 3.0 3.0 3.0 3.0

Japan 1.5 0.8 1.0 1.2 1.5 2.0 2.0

European Union 28 0.2 1.0 1.4 1.5 1.5 2.0 2.0Germany 0.5 1.5 1.9 2.0 2.0 2.0 2.0

France 0.3 0.8 1.2 1.5 2.0 2.0 2.0

United Kingdom 1.9 3.0 2.7 2.5 2.5 2.5 2.5

South Korea 2.8 3.5 3.5 3.5 3.5 3.5 3.5

New Zealand 2.4 3.2 3.2 2.5 2.5 2.5 2.5

Emerging economies 4.7 4.6 5.2 5.1 5.1 5.3 5.3

Non-OECD Asia 6.5 6.4 6.6 6.7 6.7 6.7 6.7

South East Asia d 5.2 5.0 5.3 5.5 5.5 5.5 5.5

China e 7.7 7.2 7.4 7.0 7.0 7.0 7.0

Chinese Taipei 2.1 2.8 3.5 3.5 3.5 3.5 3.5

India 4.4 5.0 5.5 5.5 5.5 6.0 6.0Latin America 2.7 2.5 2.5 3.0 3.0 3.0 3.0

Middle East 2.4 3.1 4.1 4.0 4.0 4.0 4.0

World c 3.0 3.5 3.8 3.7 3.8 3.8 4.0

Inflation rate b

United States 1.5 2.3 2.3 2.3 2.3 2.3 2.3


a BREE assumption. bChange from previous period. c Weighted using 2012 purchasing power parity (PPP) valuation of country gross domestic product by IMF. d Indonesia,Malaysia, the Philippines, Thailand and Vietnam. e Excludes Hong Kong.Sources: BREE; ABS; IMF; OECD.

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The outlook for key economies

The United States

The US economic recovery has continued to gain momentum in2014 with most headline indicators showing improvements after aweather affected March quarter. The US Federal Reserve hasstuck with its scheduled draw down in bond purchases under QE3

and markets are now focused on when interest rates will beginincreasing. Inflation is contained in the US and there is scope forinterest rates to remain low in the short term to provide furtherstimulus.

Over the remainder of 2014, the US is forecast to continue itseconomic recovery, supported by stronger consumptionexpenditure, exports and fixed investment. As an indication ofstronger economic performance, unemployment in July decreasedto 6.2 per cent which was down 1.1 percentage points from theprevious year.

In response to positive economic indicators, consumer andbusiness confidence has increased. The Federal Reserve reporteda rebound in business optimism in i ts August Beige Book. For 2014as a whole, US GDP is forecast to be 2.1 per cent. Geopoliticalevents weighing on business and consumer confidence are keyrisks to growth over the remainder of 2014.

In 2015 US GDP growth is forecast to rise to 3 per cent due toexpected higher consumer spending and business investment innew structures and equipment. Lower domestic energy pricescontinue to provide a source of economic growth and support

higher household consumption and business investment. Thelooming increase in interest rates in 2015 is a risk to US economicgrowth and market responses to the change in monetary policy areuncertain.

Over the remainder of the outlook period from 2016 to 2019, USeconomic growth is projected to remain around 3 per cent a yearas the economy stabilises. However growth may be hampered byinterest rates rising too quickly, with subsequent f low on effects toconsumer spending and investment weighing on economic growth.

62

63

64

65

66

67

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

2

4

6

8

10

12

%%

Labor force participation rate (lhs) Unemployment rate (rhs)

Figure 1.3: US unemployment and participation, monthly

Source: US Bureau of Labour Statistics.

-3

-2

-1

1

2

3

4

5

6

1999 2004 2009 2014 2019

%

Figure 1.4: US GDP growth

Sources:IMF; BREE.


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China

The Chinese economy expanded by 7.5 per cent in the Junequarter, up from 7.4 per cent in the fi rst quarter, underpinned byCentral Government support measures announced earlier in theyear, including bringing forward investment in rail and publichousing construction. Despite the improved performance in June,data releases for August suggest that Chinas economy remains

vulnerable. Growth in fixed asset investment, industrial productionand PMIs were all weaker in August compared with July.

Credit growth dropped sharply in July reflecting concerns aboutChinas rising debt. Aggregate financing was 273 billion Yuan inJuly, the lowest since October 2008. While credit supply increasedin August, overall supply remained low. The fall in credit supply hasbeen linked to the banking sectors desire to reduce risk exposureand Central Government efforts to control credit growth.

One of the main drags on the Chinese economy has been the realestate sector which is in the midst of a cyclical downturn in

response to tighter credit conditions, oversupply and weak buyersentiment. Residential sales and starts declined by 10 per cent and14 per cent in the first eight months of 2014, respectively. Despiteweakening in the sector, land development regulations areencouraging developers to continue with new projects which willcontribute to further growth in the housing stock. Developers haveattempted to clear stocks through lower prices, but there has beenlimited interest from buyers.

The real estate sector accounts for around 15 per cent of theeconomy and is a major employer. There are indications that the

central and local governments are introducing measures to supportthe sector such as easing purchase restrictions and plans tointroduce property tax reforms.

Chinasinflation was recorded at 2.0 per cent in August, the lowestin four months. Weaker inflation data provided the CentralGovernment with the flexibility to introduce further policy easingmeasures. In mid-September, the Central Government providedstate-owned banks with a cash injection to facilitate increasedcredit availability to underperforming sectors.


-2

2

4

6

8

10

12

14

Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13

%ytd

Figure 1.5: Chinas quarterly contribution to GDP

f inal consumption expenditure gross capital formation net exports

Source: CEIC.

5

10

15

20

25

Manufacturing Railways Real estate Electricity Total

%ytd

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14Source: CEIC.

Figure 1.6: Growth in Chinas fixed asset investment

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The cyclical downturn in the real estate sector is expected topersist in the short-term as the housing stock is drawn down andgovernment support measures are introduced and slowly takeeffect. The real estate sector is forecast to improve from 2016,largely supported by the development of central and western China,but may not return to previous high growth rates.

While the property sector has been weak, investment in hard

infrastructure such as rail, power grids and airports has beenexpanding in response to increased government spending. GivenChinas infrastructure is still underdeveloped compared withadvanced economies, infrastructure development is expected toremain a key contributor to economic performance over the outlookperiod.

Over the medium term, Chinas GDP growth is assumed tomoderate to average around 7.0 per cent by 2019. While the rate ofgrowth is lower than the past few years, it will still support large year-on-year increases in commodity demand.

-100

-50

Source: CEIC.


48

49

50

51

52

53

54

55

56

57

Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14

HSBC China National Bureau of Statistics

Source: CEIC; Bloomberg.

expansion

Figure 1.9: Chinas manufacturing PMI

-40

-20

20

40

60

80

100

120

Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14

%yr

Figure 1.8: Chinas residential sales and starts

Starts Sales

Data is three month moving average of monthly growth rate.Source: CEIC.

contraction

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India

Indias economy grew by 5.7 per cent year-on-year in the Junequarter 2014 amid renewed optimism about Indias growthpotential. In early 2014, Narendra Modi won Indias strongestelectoral mandate in 30 years on a platform of economic growth,lower inflation and job creation. The renewed optimism in Indiaseconomy has spurred an increase in foreign direct investment on

expectations that stalled capital projects may finally be developed.Reflecting this, the Dun and Bradstreet Business Optimism Indexincreased by 9 per cent year-on-year in the second quarter.

However there remain considerable challenges in achievingimproved economic performance, including electricity shortages, apersistent current account deficit and high inflation. Indiaselectricity generation has not matched pace with consumptionresulting in increased prospects of blackouts. The shortfall hasbeen driven by the forced closure of some power plants, amidconstrained coal availability, and increasing demand for power,

caused by the increase in economic activi ty.Indias current account deficit increased by around 5 per cent amonth through early 2014 to US$12.2 billion in July. The increasingtrade deficit was fuelled by rising gold imports following a relaxationin import duties. Gold is Indias second largest import after oil andin a bid to cut the current account deficit India increased importduties on gold in 2013. Indias current account deficit will remain achallenge over the medium term, particularly with the ongoing riskof currency depreciation.

Indias inflation rate was around 10 per cent in 2013 and early

2014. In a bid to reduce inflation to 8 per cent by January 2015 and6 per cent by 2016, Indias Reserve Bank recently has decided tobase interest rates on the Consumer Price Index. In July the CPIincreased by 8 per cent year-on-year.

Over the medium term Indias GDP growth rate is projected toincrease to 6.0 per cent in 2019, supported by increasedurbanisation, infrastructure development, particularly in rail and theelectricity grid, and increased exports.


-40000

-30000

-20000

-10000

10000

20000

30000

40000

50000

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14

Figure 1.11: Indias current account

Exports Imports Trade deficit

US$m

Source: CEIC.

5

10

15

20

25

30

35

40

Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14

Figure 1.10: Indias quarterly contributions to GDP

Final consumption expenditure Fixed capital formation Exports

Source: CEIC.

INRbn

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Japan

Japans economy contracted at an annualised rate of 7.1 per cent inthe June quarter, the weakest performance since the GlobalFinancial Crisis. Growth was adversely affected by declining capitalexpenditure and lower domestic consumption following an increasein the sales tax introduced in April.

The performance of Japans economy over the coming months will

determine whether the Government will proceed with a secondincrease in the sales tax scheduled for October 2015. July trade dataimproved for the fi rst time in three months, raising hopes thatincreased exports will help partially of fset the effects of the tax.

Japans longer term growth strategy hinges around raisinginvestment, employment and productivity. However, growth is likelyto remain constrained by an aging population and the need for fiscalconsolidation. Over the medium term, Japans economic growth isprojected to strengthen to 2.0 per cent by 2019.


South Korea

South Koreas economy grew 0.5 per cent in the June quarter, downfrom 0.9 per cent recorded in March. Growth was lower owing toreduced exports to China. For 2014 as a whole South Koreaseconomy is forecast to expand by 3.5 per cent. South Korea isassumed to maintain this growth rate over the medium term,supported by increased exports as the global economy improves anda US$40 billion stimulus package announced in July that is designed

to encourage increased domestic consumption.

South Korea is heavily export dependent, with exports accounting for54 per cent of GDP in 2013. China is South Koreas largest tradingpartner, so its economic prospects are closely tied to China. If Chinastruggles to maintain its economic growth momentum and implementits reform agenda, imports from South Korea are likely to decline.

-8

-6

-4

-2

2

4

6

8

10

12


%qoq

Figure 1.12: Japans quarterly GDP, annualised

Source: Bloomberg.

0.5

1

1.5

2

2.5


%qoq

Figure 1.13: South Koreas quarterly GDP

Source: Bloomberg.

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Europe

In 2014 the EU28 is forecast to grow by 1.0 per cent underpinnedby growth in the UK and Germany which are forecast to expand by3 per cent and 1.5 per cent, respectively. Geopolitical tension withRussia over the Ukraine and subsequent sanctions are key risks toconfidence and gains from trade in the near term. In August 2014,several consumer confidence indicators declined for both the EU

and the euro area compared to July.In the June quarter 2014 the UK economy grew at 0.8 per centfrom the previous quarter driven by an expansion in the servicessector (up 1 per cent) and production output (up 0.3 per cent). TheUK economy is now 394 billion or 0.2 per cent above the pre-downturn peak of 2008. The UKs Office of National Statisticsestimates this increase to be consumer-led, with increasedspending on services in contrast to a contraction in manufacturing.

Germanys seasonally adjusted GDP contracted in the Junequarter 2014 by 0.2 per cent on the previous quarter due to growth

in imports (up 1.6 per cent) outpacing exports (up 0.9 per cent).Shipments to Russia, a major destination for Germanys exports,were down 15 per cent in the first five months of 2014 comparedwith 2013.

France recorded no GDP growth in the June quarter and itsunemployment rate increased to 10.2 per cent. A cabinet reshufflein August resulted in a new government that is now consideringreforms such as changes to labour laws to assist economic growth.

Over the medium term growth in European economies is projected

to return to historical annual growth rates (between 2-3 per cent)from 2016. Risks to this assessment include persistently lowinflation, high unemployment and a stalled economic recovery. TheEuropean Central Bank announced further interest rate cuts in

August to stimulate spending citing low inf lation as a concern.


5

10

15

20

25

30

May-04 May-09 May-14

%

UK EU27 France Germany Greece

Figure 1.14: Europes unemployment (seasonally adjusted)

Source:Eurostat.

0

1

2

3

4

5

90

100

110

120

130

140

Aug-04 Aug-06 Aug-08 Aug-10 Aug-12

%2010=100

Euro area industrial production Retail Sales Inflation (rhs)

Figure 1.15: Europes industrial production, retail sales and inflation

Source:Platts.

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Economic outlook for Australia

Australias GDP growth rate increased 0.5 per cent in the Junequarter 2014 in seasonally adjusted terms, slower than the 1.1 percent growth observed in the March quarter. An increase ininventories following destocking during the March quarter,consumption expenditure and private investment were partiallyoffset by lower net exports and public investment.

In 2013-14 mining was the key contributor to Australias economicgrowth, followed by financial services and construction. Althoughcommodity prices and investment in the sector have begun toease, production of key mineral and energy commodities increasedconsiderably over the past twelve months. Reflecting this, iron oreand coal export volumes increased by 27 per cent and 10 per centyear-on-year in the f irst half of 2014, respectively.

For the full year 2013-14, Australias GDP growth was 3.1 per cent,supported by housing construction and consumption expenditure.However, the high value of the Australian dollar, further declines incapital investment as the construction of large-scale resourcesprojects are completed and the high cost of doing business will bekey challenges to maintaining this growth rate over the short term.These challenges are expected to persist into 2014-15, contributingto a forecast moderation in economic growth to 2.5 per cent.

Over the remainder of the outlook period to 2018-19, AustraliasGDP is assumed to recover to trend growth of around 3.0 per cent.Capital expenditure, particularly in resources and energy projects,has been a key contributor to Australias economic growth over thepast several years. As these projects are completed and Australiatransitions to a period of higher commodity production, exports ofresources and energy commodities and sustained high levels ofresidential construction activ ity will be the key drivers of GDPgrowth over the medium term.


-0.5 0.5 1 1.5

Mining

Construction

Transport

Financial services

Professional services

%points

Figure 1.16: Contribution to growth Jun-13 to Jun-14

Source:ABS.

-1

1

2

3

4

5

6

199091 199495 199899 200203 200607 201011 201415 201819

%

Figure 1.17: Australias economic growth

Sources:ABS; BREE.

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Although the Australian dollar-US dollar exchange rate declined inearly September in response to expectations of further interest rateincreases in the US, the exchange rate remained relatively stablethroughout early 2014.

Despite declining commodity prices and subsequent deterioration inthe terms of trade, the Australian dollar has remained high byhistorical standards. The relative strength of the Australian economyand monetary policies of key central banks has supported demandfor the Australian dollar. The exchange rate averaged around 0.92 in2013-14 and is forecast to remain at similar levels in 2014-15.

Over the medium term, the Australian dollar is assumed todepreciate and average 0.87 in 2018-19 as commodity pricesdecline and interest rates of key economies being to normalise.


Table 1.2: Key macroeconomic assumptions for Australia

unit 201213 201314 201415 a 201516 a 201617 a 201718 a 201819 a

Economic growth bc % 2.6 3.1 2.5 2.6 2.7 2.8 3.0

Inflation rate b % 2.4 3.0 2.7 2.5 2.2 2.2 2.2

Interest rate d % 3.1 2.5 2.5 2.8 3.0 3.5 4.0

Exchange rate e US$/A$ 1.03 0.92 0.92 0.90 0.89 0.88 0.87

a BREE assumption. b Change from previous period. c Seasonally adjusted chain volume measures. d Median RBA cash rate.e Average of daily rates.Sources: BREE; ABS; RBA.

60

80

100

120

80

100

120

140

160

199394 199899 200304 200809 201314

Index2011-12=100

Index1993-94

=100

exchange rate terms of trade ratio (rhs)

Sources: ABS; Bloomberg.

Figure 1.18: Australias exchange rate and terms of trade

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Exploration

In 2013-14 lower commodity prices and cost cutting led to a declinein exploration. Exploration expenditure decreased 12 per cent,relative to 2012-13, to $6.8 billion. A 0.4 per cent increase inpetroleum exploration was more than offset by a 32 per cent dropin minerals exploration. With lower commodity prices forecast, apick up in exploration is unlikely in the short term.

Western Australia bore the brunt of the drop in explorationexpenditure which was down 17 per cent, or $839 million, to $4.2billion. Expenditure in Queensland was down 19 per cent to $1.1billion and the combined expenditure of New South Wales, Victoriaand Tasmania decreased 15 per cent to $382 mil lion. Expenditurein South Australia and the Northern Territory bucked the trend andincreased 5 per cent and 54 per cent, respectively.

The decrease in minerals exploration expenditure was evenlyspread between exploration at existing and new deposits whichwere down 32 per cent and 33 per cent, respectively, in 2013-14.

1.5

3

4.5

6

7.5

9

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

A$b

Figure 1.19: Australias exploration expenditure

Petroleum Mineral

Source: ABS.


200

400

600

800

1000

1200

Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014

A$m

Figure 1.21: Mineral exploration, by deposit type

Existing Deposits New Deposits

Source: ABS.

1

2

3

4

5

6

WA Qld NSW, Vic, Tas SA NT

A$b

Figure 1.20: State exploration expenditure

2010-11 2011-12 2012-13 2013-14

Source: ABS.

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Capital expenditure

Over the past decade, there was a rapid escalation in investment inresources and energy projects fuelled by growing consumption andhigher global commodity prices. However, the state of the market isno longer supportive of investment in resources and energy projectsdespite the introduction of government initiatives to streamline theapprovals process and award major project facil itation status. In

2013-14, mining industry capital expenditure was $90.3 billion, down4.6 per cent f rom 2012-13.

Given the forecast softness in commodity prices over the short term,the outlook for investment in Australia is subdued. As high-valueLNG projects are completed over the coming years, the stock ofinvestment in the sector will be drawn down. The downturn ininvestment has come from a very high point, and while investmentactivity has slowed a substantial number of resources and energyprojects continue to be developed in Australia.

Australia has high quality mineral and petroleum deposits that can

be developed when market conditions improve. Over the outlookperiod, Australia will compete with other resource-rich countries tosecure investment and will need to ensure it remains a world leadingdestination for attracting capital.

Mining sector employment

Mining sector employment was 265 000 people in the June quarter2014, up 1.6 per cent compared with the June quarter 2013, but 2.4per cent lower than in the March quarter 2014. Cost pressures havereduced the profitability of many producers who have sought toreduce staff numbers. As part of the efforts to reduce costs, manycompanies have been cutting jobs and insourcing some functionsthat had previously been undertaken by contractors. Companiesservicing the industry have also been reducing the number ofemployees.

While the reduction in investment will likely reduce employment inconstruction related jobs, the projected increase in commoditiesproduction will provide employment opportunities over the mediumterm.

5

10

15

20

25

30

Jun-2008 Jun-2009 Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014

A$b

Figure 1.22: Mining industry capital expenditure

Buildings & structures Equipment, plant & machinery

Source: ABS.


Australias resources and energy commodities, production and

exports

Commodity prices have declined steadily over the past twelvemonths in response to substantial increases in supply rather thanbecause of waning demand. The decline in commodity prices,alongside rising costs, have created a more challenging operatingenvironment for Australian producers. Sustained lower commodityprices have encouraged cost-cutting drives and productivi ty

improvement measures. However, a sustained period of low pricesare now forcing high cost producers to exit the market

The supply glut that has emerged in most commodity markets isexpected to persist over the next couple of years and contribute tocontinued softness in commodity prices. As supply growth slows inresponse to reduced investment and the closure of high-costoperations, projected consumption growth will begin to soak up thesurplus supply and support higher prices over the medium term.

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Australias total earnings from mineral and energy commoditiesincreased by 12 per cent in 2013-14 to total $195 billion, supportedby robust growth in both minerals and energy export volumes.Mineral commodity earnings were $124 billion, up 6 per cent from2012-13, driven largely by increased iron ore export volumes.Earnings from energy commodities were $71 billion, up 7 per cent,underpinned by higher earnings from LNG, crude oil and coal.

In 2014-15, Australias earnings from mineral and energycommodities are forecast to decline by 1 per cent to $192 billion ashigher export volumes for most commodities are more than offset byforecast lower export prices and a persistently high Australian dollar.LNG is forecast to deliver the greatest increases in volumes andvalues following the commissioning of new LNG facilities. Iron orevolumes are forecast to increase by 13 per cent in 2014-15,underpinned by a ful l year of production by recently started mines.However, earnings from iron ore are forecast to decline by 4 per centbecause of forecast lower prices.

50

100

150

200

250

300

Jun-06 Jun-08 Jun-10 Jun-12 Jun-14

000people

Figure 1.23: Total mining employment

Source: ABS.


20

40

60

80

100

120

Exploration and services Metal ore Coal Oil and gas Other mining

000people

Figure 1.24: Mining sector employment

Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14

Source: ABS.

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Despite the forecast decline in export earnings in 2014-15, theoutlook for Australias resources and energy exports remainspositive. For several commodities, including iron ore and coal, pricesare projected to rebound after 2016 as consumption growth starts tocatch up with the recent jumps in production capacity and the recentinvestment in the sector will contribute to a rapid increase in

Australias export volumes. Australias earnings from resources andenergy exports are projected to reach $251 billion (in 2014-15

dollars) in 2018-19. Resources and energy export earnings areprojected to total $115 and $136 billion (in 2014-15 dollars) in 2018-19, respectively.


Table 1.3: Medium term outlook for Australias resources and energycommodities

unit 201213 201314 201415 f 201516 z 201617 z 201718 z 201819 z

Value of exportsResources and energy A$m 173 997 195 141 192 357 217 952 241 712 265 561 274 401

real b A$m 183 310 200 410 192 357 212 636 230 740 248 049 250 789

Energy A$m 67 001 71 467 72 926 88 978 105 890 121 473 125 853

real b A$m 70 588 73 396 72 926 86 808 101 083 113 463 115 023

Resources A$m 106 996 123 674 119 431 128 974 135 822 144 087 148 548real b A$m 112 722 127 013 119 431 125 829 129 657 134 586 135 766

Mine production

Gross value A$m 167 037 187 335 184 663 209 234 232 043 254 938 263 425

b In current financial year Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABS.

40

80

120

160

199091 199495 199899 200203 200607 201011 201415 201819

2014-15A$b

energy resources

Sources: BREE; ABS.

Figure 1.25: Australias resources and energy export earnings

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Table 1.4: Australias resources and energy commodity exports, by selected commodities

Volume Valueunit 201314 201819 z CAGR unit 201314 201819 z CAGR

Alumina kt 18 614 17 483 1.2 A$m 5 711 6 880 3.8

Aluminium kt 1 576 1 119 6.6 A$m 3 482 2 802 4.3

Copper kt 1 036 1 310 4.8 A$m 8 691 13 158 8.6

Gold t 277 297 1.4 A$m 13 009 16 138 4.4

Iron ore Mt 651 890 6.4 A$m 74 824 88 112 3.3Nickel kt 214 259 3.8 A$m 3034 4 357 6.3

Zinc kt 1 542 1 771 2.8 A$m 2 362 3 763 9.8

LNG Mt 24 78 26.5 A$m 16 389 57 136 28.4

Metallurgical coal Mt 180 195 1.5 A$m 23 268 30 840 5.8

Thermal coal Mt 195 239 4.2 A$m 16 699 22 080 5.7

Oil kbd 255 239 1.3 A$m 11 113 10 562 1.0

Uranium t 5 424 8 900 10.4 A$m 519 1 198 18.2


f BREE forecast. CAGR is compound annual growth rate, in percentage terms.Sources: BREE; ABS.

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A$2.0b

A$3.5b

A$2.4b

A$3.2b

A$5.7b

A$8.7b

A$11.1b

A$13.0b

A$16.7b

A$16.4b

A$23.3b

A$74.8b

A$1.9b

A$2.4b

A$3.1b

A$3.6b

A$5.8b

A$8.1b

A$11.6b

A$12.2b

A$15.1b

A$18.4b

A$23.2b

A$71.7b

15 30 45 60 75 90

Lead

Aluminium

Zinc

Nickel

Alumina

Copper

Crude oil

Gold

Thermal coal

LNG

Metallurgical coal

Iron ore and pellets

A$b

201415 f 201314

Figure 1.26: Australias major resources and energy commodity exports

fBREE forecastEUV is export unit value

201415 fvolume EUV value

p q q13% 15% 4%

p q l2% 3% 0%

p q p13% 1% 12%

p q q1% 10% 9%

p q q1% 7% 6%

p q p

8% 3% 4%q q q

4% 3% 6%

q p p6% 9% 2%

p p p5% 6% 11%

p p p

11% 20% 33%

q q q25% 8% 30%

q p q9% 6% 4%


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SteelBen Witteveen

Increas ing urban pop ulat ions and ind ustr ial ou tput in

emerging econo mies has been a driving force of the world in

the past decade. Despite short term risks associated w ith the

current downturn in Chinas housing market, fixed assetinvestment in housin g, infrastructure and ind ustrial

development in emerging economies wi l l cont inue to support

growth in w orld steel consumpt ion over the medium term.

World steel overview

In 2014 growth in world steel consumption is forecast to slow butstill increase by 2.6 per to total 1.62 bil lion tonnes. Lower growth insteel production is forecast due to high prevailing inventory levelsand over production in some key producing nations in 2013. Worldsteel production is forecast to increase 1.6 per cent in 2014 andtotal 1.6 billion tonnes.

Steel consumption in emerging economies has grown rapidly overthe past decade, yet many of these countries still haveconsiderably lower steel usage rates compared to advancedeconomies. Steel intensities in these emerging economies areunlikely to reach the levels of countries like South Korea andJapan, whose economies are based on relatively high proportionsof exports of steel-intensive exports like ships and cars.Nevertheless there remains considerable growth potential in highlypopulated emerging economies that require further investment inhousing, infrastructure and manufacturing to support their growingurban populations and industrial bases.

In the medium term, world steel consumption is projected toincrease at an average annual rate of 1.5 per cent and total 1.77billion tonnes in 2019.


400

800

1200

1600

2000

2012 2013 2014 2015 2016 2017 2018 2019

Figure 2.1: World steel consumption

China Rest of world European Union 28 United States India Japan

Sources: BREE; World Steel Association.

Mt

200

400

600

800

1000

1200

1400

10 20 30 40

Consump

tion

percap

ita

(kg

)

GDP per capita (US$)

Figure 2.2: Peak steel intensity since 1970

Korea2008

UnitedStates

1973

Germany2007

Japan1990

China2013

Thailand2013

Vietnam2013

India2013

Sources: World Bank, World Steel Association

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Table 2.1: World steel consumption(Mt)

2012 2013 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

European Union 28 156 150 152 154 157 159 162 164

United States 102 101 102 102 103 103 104 104

Brazil 28 29 30 31 31 32 32 33

Russian Federation 49 50 51 51 52 52 53 53China 688 729 755 775 792 811 825 834

Japan 69 70 71 72 72 72 72 70

South Korea 56 54 55 56 57 58 58 59

India 77 79 83 87 91 96 101 105

World steel consumption 1 541 1 578 1 619 1 647 1 682 1 717 1 746 1 769

Table 2.2: Crude steel production(Mt)

2012 2013 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

European Union 28 169 167 164 164 164 165 166 167

United States 89 87 88 89 90 92 93 95

Russian Federation 71 69 69 69 70 71 72 73

China 709 775 799 819 834 849 863 874

Japan 107 111 111 112 112 111 110 109

South Korea 69 66 67 67 68 69 69 70

India 77 81 85 90 94 98 103 107

World steel production 1 537 1 602 1 628 1 656 1 684 1 712 1 740 1 766

f BREE forecast. zBREE projectionSources: BREE; World Steel Association.

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China

In the first eight months of 2014 steel prices in China havecontinued to trend downwards due to overcapacity in the marketand slowing consumption demand growth. Benchmark prices forhot-rolled sheet declined by 9 per cent to RMB3169 and rebar by15 per cent to RMB2974 from January to September 2014. Chinasbenchmark prices are expected to remain subdued over the short

term, underpinned by high inventories, slower consumption growthand excess capacity.

Chinas steel production capacity has grown at a rapid rate in thepast decade, but with slowing growth in residential, infrastructureand business investment, capacity growth has out-pacedconsumption growth. China invested heavily in new steelproduction capacity over the past decade and now has installedcapacity far in excess of requirements. Despite steel consumptiongrowing 6 per cent in 2013 and Government directions to startclosing older, higher polluting steel mills it estimated that there is

still over 200 million tonnes of under-utilised production capacity inChina.

Excess capacity and declining prices have put many steelproducers under increasing financial pressure over the past threeyears. Chinas steel industry profi ts have declined substantiallysince 2011 with the proportion of loss making firms increasing fromaround 10 per cent in 2011 to nearly 50 per cent in 2014. However,since the start of 2014 this proportion has declined as input costshave decreased and a number of loss making fi rms have closed inaccordance with government credit market reforms. Excess

capacity and low demand growth are likely to weigh on steelproducers for some time to come.

In an effort to reduce excess capacity and pollution in the sector,particularly in Hebei and the north-east regions, the ChineseGovernment has announced plans to shut 47 million tonnes of steelcapacity this year with further closures planed through to 2017.Given Chinas excess capacity, these closures are not expected tohave a material effect on production in the medium term.


3500

4000

4500

5000

5500

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

Figure 2.3: China benchmark steel prices

HR sheet Rebar 25mm

Source: Bloomberg.

RMB

-20

-10

10

20

30

40

50

60

70

-4000

-2000

2000

4000

6000

8000

10000

12000

14000

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

Figure 2.4: China steel industry profitability

Month ly industry profi t % loss making fi rms (rhs)

Source: CEIC.

MillionRMB

%

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In the first half of 2014, Chinas steel production increased by 21per cent year-on-year to 473 million tonnes. Growth in Chinassteel production is forecast to slow over the remainder of 2014 inresponse to waning sales growth and higher inventories amid adownturn in Chinas housing sector. For 2014 as a whole, Chinassteel production is forecast to increase by 3.1 per cent to 799million tonnes.

The rapid rise in steel production in early 2014 contributed toincreased steel inventories and exports. Chinas steel inventorieswere 14.4 million tonnes in July, up 10 per cent year-on-year, andaverage inventory holdings in the first half of 2014 were 8 per centhigher than first half 2013.

Slowing domestic steel demand growth has resulted in an increasein steel exports. Chinas steel exports were up 34 per cent to 41million tonnes in the first half of 2014. Current steel export levelsare not likely to be sustainable; in the past twelve months Chinassteel exports were around the same as South Koreas annual

production in the same period. There is also mounting pressure ongovernments to protect their local steel industries through tariffs onChinas steel imports, though the WTO has ruled against suchmeasures being used by the US this year.

In the short term, growth in Chinas steel production is forecast toslow to 2.5 per cent in 2015 to reduce unsustainable levels ofgrowth in inventories and exports as well as in response to lowerdemand growth. Over the next five years Chinas steel productionis projected to increase at an average rate of 1.3 per cent to 874million tonnes in 2019. Although more mills are scheduled to close

there remains ample capacity to deliver this increase and new millsin western provinces are expected to open as economic activ itypicks up and requires more steel.

A protracted period of tight credit in China, as part of ongoingmarket reforms, may accelerate the closure of unprofitable capacityand accelerate the closure of marginal producers. However, it isnot anticipated to occur at a rate that results in lower steelproduction in the medium term.


40

80

120

160

200

240

Mar 09 Dec 09 Sep 10 Jun 11 Mar 12 Dec 12 Sep 13 Jun 14

Figure 2.5: China steel production

Crude steel production Trend

Mt

Source: CEIC.

3

6

9

12

15

18

Mar08

Sep08

Mar09

Sep09

Mar10

Sep10

Mar11

Sep11

Mar12

Sep12

Mar13

Sep13

Mar14

Jul14

Figure 2.6: China end of quarter steel inventory

Source: CEIC.

Mt

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Most of the risk to steel production growth in China stems fromrisks affecting steel consumption growth in the medium term. Thisgrowth is unlikely to be uniform across the period and subject tonormal economic cycles, but in the medium and long-term thecentral governments plans for economic growth are still expectedto support increasing urbanisation and continued investment ininfrastructure, housing, and heavy industry. Al l of which are keydeterminants of steel consumption. As outlined by Wilkins and

Zurawski 20141, the level of infrastructure in China remains belowmost developed economies and rail in particular still hasconsiderable scope for expansion.

Swings in rail investment have previously been strong drivers ofsteel sales (and iron ore price) cycles in China. While railinvestment is expected to pick up in 2014 due to plans tosubstantially increase the kilometres of tracks laid, the downturn inhousing investment will weigh heavi ly on steel consumption.

Investment in residential construction has declined to 13 per cent in2014, down from 20 per cent in 2013. Government policiestargeting credit market reforms have reduced new loans in 2014and resulted in lower housing sales and starts. With the prices ofnew developments and secondary sales still falling a rebound inthe short-term is unlikely.

Residential construction in China is a key driver of the economyand is an important source of employment. While China is targetinga shift from investment led to consumption based economic growth,a lagging construction sector will challenge its ability to achieveannounced GDP growth and employment targets.

Measures to support the housing sector have already started to berolled out. The Peoples Bank of China has announced a series oftargeted measures including lowering deposit ratios and support tofirst home buyers. Provincial governments have also started to freeup more land for residential development.


5

10

15

20

25

Mar 09 Dec 09 Sep 10 Jun 11 Mar 12 Dec 12 Sep 13 Jun 14

Figure 2.7: China steel exports

Quarterly steel exports Trend

Mt

Source: CEIC.

100

200

300

400

500

600

700

0 10000 20000 30000 40000 50000

Consump

tion

percap

ita

(kg

)

GDP per capita (RMB)

Figure 2.8: China steel intensity

Sources: CEIC; World Steel; IMF.

2013

2009

1980

2012

1. Wilkings, K., and Zurawski, A., 2014. Infrastructure Investment In China.

RBA Bulletin June Quarter 2014.

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25

50

75

100

125

150

175

200

225

250

Hebei Rest of China Jiangsu Shandong Liaoning Tianjin Shanxi Hubei Anhui Hunan

Figure 2.10: China crude steel production by region

2010 2011 2012 2013

Mt

Source: CEIC.

Around 54 per cent of Chinas population currently live in urbanareas and by 2019 this rate is expected to have climbed to 60 percent. This migration in population will result in around 80 millionpeople moving to cities over the next 5 years. While an oversupplyof buildings exists in China today, over the medium term a reboundin construction will be required in order to accommodate thesepeople in cities. Government policies promoting urban rejuvenationand re-development of shanty towns are also expected to support

an eventual pick up in residential construction in China.Chinas steel consumption is forecast to increase by 3.6 per cent in2014 to 755 million tonnes. Over the outlook period Chinas steelconsumption is projected to increase at an average annual rate of1.7 per cent and total 834 million tonnes in 2019.

-50

50

100

150

200

250

300

Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14

Figure 2.9: China fixed asset investment (3mma)

Rail Manufacturing Real estate

%

Source: CEIC.

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India

While steel producers in China have faced lower steel prices, inIndia steel prices have been relatively stable in 2014. In July theprice of pig iron in India was 4 per cent higher at US$543 than inJanuary (although down from US$551 in May) and rebar hadincreased 2 per cent to US$781. Indias steel market is dominatedby a few, largely state owned companies, which keeps utilisation

rates comparatively high and prices stable. By comparison, Chinahas a more fragmented industry with many producers and lowerutilisation rates.

Steel consumption growth in India has been erratic since 2009 andregulatory barriers have often stifled investment potential. Delaysto starting and completing infrastructure projects have beencommonplace in this time. Indias new government was voted topower on a platform of pro-business policies to quick-start theIndian economy. It is expected that the new Governments reformagenda and infrastructure plans will support higher steelconsumption in the medium term.

Initial indicators are positive for investment and reform and theIndian purchasing managers index surged 2 per cent to 52.4 for theSeptember quarter (a recording over 50 indicates managersbelieve their will be an expansion in the market), indicating thatsteel production is likely to continue expanding in the near term.

In 2014 Indias steel consumption is forecast to grow 5 per centand total 83 million tonnes. In 2015, steel consumption is forecastto increase by a further 4.8 per cent to 87 million tonnes.Government investment in public infrastructure, including dedicated

freight networks linking landlocked northern states to the sea willunderpin this growth.

The government has also outlined plans to streamline projectapprovals in an attempt to increase foreign direct investment intoIndia. Based on these plans and general investor optimism nearly$14 billion of foreign funds have flowed into the Indian economythis year.

400

500

600

700

800

900


Figure 2.11: India benchmark steel prices

Pig iron Rebar Source: CEIC

US$/t

1

2

3

4

5

6

7

8

Jan 08 Oct 08 Jul 09 Apr 10 Jan 11 Oct 11 Jul 12 Apr 13 Jan 14

Figure 2.12: Indias steel production

India steel production Trend

Source: CEIC

Mt

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Over the remainder of the outlook period steel consumption in Indiais projected to increase at an average annual rate of 4.8 per centand total 105 million tonnes in 2019. Projected growth will bedriven by Government initiatives to reduce infrastructure bottlenecks by starting additional rail and electrical generation projects.

In 2014 Indias steel production is forecast to increase by 5 percent to 85 million tonnes and in the process, make it the fourthhighest steel producer in the world (behind China, Japan and theUS).

Over the outlook period annual growth in Indias steel production isprojected to average 4.1 per cent and result in steel production of107 million tonnes in 2019. Ongoing urbanisation and continuedinfrastructure investment is expected to support this growth.

Japan

Japans steel consumption is forecast to grow by 1 per cent in 2014to 71 million tonnes and 2015 to 72 million tonnes. Existing fiscal

spending on public infrastructure is expected to support growththrough this period. Japans steel consumption is projected toremain broadly unchanged over the next five years and at around70 million tonnes in 2019.

Japans steel production is estimated to grow by 0.5 per cent in2014 to 111 million tonnes and then a further 0.5 per cent in 2015to 112 million tonnes. Government expenditure on publicinfrastructure is expected to provide the support for this productiongrowth. However over the remaining outlook period Japans steelproduction is projected to average 1 per cent annual contraction

and total 109 million tonnes in 2019. Production is projected todecrease as demand contracts following an end to the currentstimulus package, relocating manufacturers and shrinking exports.Steel mills are also projected to begin moving offshore to takeadvantage of lower costs.


10

20

30

40

50

60

70

80

0 1 2 3 4 5

Consumptionpercap

ita

(kg

)

GDP per capita (purchasing power parity)

Figure 2.13: India steel intensity

Sources: CEIC; World Steel; IMF.

50

60

70

80

90

100

110

120

130

1995 1998 2001 2004 2007 2010 2013f 2016z 2019z

Production Consumption

Mt

f BREE forecast. zBREE projectionSources: World Steel; BREE.

Figure 2.14: Japan steel production and consumption

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South Korea

In 2014 South Koreas steel consumption is projected to grow by 2per cent to 55 million tonnes. Over the outlook period SouthKoreas steel consumption is projected to increase at an averageannual rate of 1.2 per cent and total 59 million tonnes in 2019.Production of steel intensive machinery, cars and ships for exportwill remain the primary drivers of steel consumption in SouthKorea; although over the outlook period these industries will faceincreasing competition from new competitors in emergingeconomies.

South Koreas steel production is estimated to grow by 1 per cent in2014 to 67 million tonnes. Over the outlook period steel production isprojected to average 1 per cent annual growth and 70 milliontonnes in 2019. Steady demand growth to support higher exports ofsteel intensive manufactured goods is expected to underpin thisgrowth.

United StatesUS steel consumption in 2014 is forecast to grow 0.5 per cent andtotal 102 million tonnes. Growth in residential construction (whichaccounts for 40 per cent of US steel demand) and carmanufacturing (which accounts for 25 per cent of US steeldemand) will underpin this increase. In 2013 US housing startsincreased 19 per cent and sales of US automotives grew 7 per centand provided momentum for further growth in 2014. In the mediumterm, US steel consumption is projected to increase at an averageannual rate of 0.5 per cent and total 104 mil lion tonnes in 2019.

US steel production is forecast to average 1 per cent annual growthover the outlook period and 95 million tonnes in 2019. An increasein domestic demand and cheaper production costs are expected tosupport this growth. US steel mills have begun to utilise gas as apower source helping to lower the cost of production and theirreliance on imports. A key risk to the US steel industry is the rise inlow cost steel imports from Asia. While the US government hasraised import duties on such items, the WTO has ruled that this isinconsistent with its agreements on trade.


-20

-10

10

20

30

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 2.15: South Korea change in steel use

Production Industrial production Exports

Source: Bloomberg.

%

2000

2500

3000

3500

4000

Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14

Figure 2.16: US steel end-use growth

U.S. Housing Permits Domestic car sales

Source: Bloomberg.

1000units

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European Union (EU)

EU steel consumption is forecast to grow by 1.3 per cent in 2014 to152 million tonnes, though this will not be evenly spread acrossmember nations. Steel consumption in Italy and Spain is forecast tocontract, while Germanys steel consumption is forecast toincrease with continued growth in its exports. EU steelconsumption is forecast to grow at an average annual rate of 1 percent over the next five years and total 164 million tonnes in 2019.

A broad-based return to economic growth, an increase inhousehold construction and increasing exports are expected tosupport this growth.

Steel production in the EU is forecast to contract by 1.7 per cent in2014 and 0.1 per cent in 2015 to 164 million tonnes. Thiscontraction will be the result of lower production in Italy and Spainwhos economies are yet to rebound following the eurozone debtcrisis. Over the remainder of the outlook period EU steel productionis forecast to rebound in line with improving economic conditions.Steel production is projected to increase at an average annual rateof around 1 per cent to 167 million tonnes in 2019 as the majorsteel producing regions, Spain, Italy, France, UK and Germany,return to growth.

110

130

150

170

190

210

230

1995 1998 2001 2004 2007 2010 2013f 2016z 2019z

Figure 2.17: EU 28 steel market

Crude steel production Crude s teel consumption

f BREE forecast. zBREE projectionSources: World Steel; BREE.

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Iron ore

Ben Witteveen

Iron ore prices h ave fal len 37 per cent since th e start of 2014

due to increased supply from Austral ia and moderating

demand growth in China. Since the move to spot pr ic ing i ron

ore prices have displayed regular cycl ical swin gs. While prices

are expected to rebound from current low s, over the medium

term the peak of each reboun d and troug h is l ikely to be lower

as more supp ly enters the market.

Prices

A rapid increase in iron ore supply combined with moderating growthin Chinas steel production have pushed iron ore prices lower in2014. Prices have fallen nearly 40 per cent down from around

US$130 a tonne (CFR China) in January to US$82 a tonne inSeptember. Iron ore price volatility is not uncommon; large in-yearprice swings have occurred since the move to spot pricing 5 yearsago in response to seasonal shifts in steel and iron ore production inChina. While prices have decreased US$50 in 2014, similar cyclicaldownturns happened in both 2012 and 2013 and produced priceranges of US$62 and US$59, respectively.

In 2012, iron ore prices reached a low of US$87 a tonne inSeptember before rebounding to over US$140 a tonne by the end ofthe year. The key dif ference with this latest cyclical price downturn is

the availability of supply. Since 2012 there has been a substantialincrease in iron ore mine capacity around the world. In Australiaalone over 200 million tonnes of new capacity has started productionin the past twelve months. The increased availability of supply hasaltered the market dynamic and as the risk of having to pay higherprices that comes with tighter supply conditions has not abated,Chinese buyers do not appear to be stocking up on iron ore as theypreviously did. In addition, price competition has increased betweensuppliers who have been forced to offer lower prices to make salesand offer higher discounts on lower grade ores.


225

450

675

900

50

100

150

200


Figure 3.1: Daily iron ore and steel prices

TSI 62% CFR rebar (rhs)Source: Bloomberg.

IronoreUS$/t

Chinasteel

US$/t

40

80

120

160

200

Jan 09 Oct 09 Jul 10 Apr 11 Jan 12 Oct 12 Jul 13 Apr 14

US$/t

Source:Bloomberg

Figure 3.2: Iron ore pricecycle

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The change in the iron ore market balance has been exacerbated bya slowing in Chinas steel production growth. While steel productionhas increased in 2014, it has been below previous levels and failedto absorb the surge in supply. Credit market conditions in Chinahave affected end-user demand for steel and led to lower steel salesgrowth and higher inventory levels. The drag of lower steel intensivefixed asset investment growth ultimately feeds through to iron oredemand and pricing, as it has in previous pricing cycles.

Iron ore prices are expected to rebound from the current low levels,but remain well below the high prices seen in previous years due tothe supply overhang that is prevailing. As in previous price cycles, anumber of higher cost producers, both in China and around theworld, will be forced out of the market over time to reduce theoversupply.

Iron ore prices are forecast to average US$94 a tonne for the fullyear 2014, down 26 per cent relative to 2013. Unlike previous pricecycles, 2014 has had lower prices over a longer period andsubsequently produced a lower than expected average price. The

iron ore price is forecast to rebound from current low levels, but theaverage price for 2015 is forecast to average US$94 and not returnthe levels seen in early 2014.

Over the next 5 years, iron ore prices are projected to averagebetween US$90 and US$95 a tonne. Further increases in supplyindicate increasing price competition will be needed to push morehigh cost supply out of the market over the next two years. Decisionsto close mines are unlikely to be made easily given the costassociated with placing operations on care and maintenance. Ironore suppliers are therefore likely to persist as long as possible but

eventually prices that are substantially lower than high cost suppliesfrom both exporters and domestic producers in China will result inreduced supply. The iron ore pricing cycle in expected to continue inthe medium term. Its peaks and troughs will be lower as pries trenddown in response to growing supply availability and iron ore pricesare projected to average US$86 a tonne in 2019 (in 2014 dollars).

40

80

120

160

200

40

60

80

100

120

Mar 10 Dec 10 Sep 11 Jun 12 Mar 13 Dec 13 Sep 14

Figure 3.4: Iron ore price and China port stocks

China iron ore port stocks TSI 62% CFR (rhs)

US$/t

Source: Bloomberg.

Mt

40

80

120

160

200

1999 2003 2007 2011 2015 2019

2014US$/t

Figure 3.3: Quarterly iron ore prices

Fe 62% FOB Australia

Sources: Bloomberg; BREE.

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World trade in iron ore

Overview

Global iron ore trade is forecast to increase by 8.4 per cent in 2014,relative to 2013, to 1.33 bi llion tonnes. Supply from Australia isestimated to increase by 128 million tonnes while imports into Chinaare estimated to increase by 55 million tonnes. In 2015 world iron

ore trade is forecast to increase by 4.2 per cent to 1.38 bil liontonnes. Over the outlook period world iron ore trade is projected toincrease at an average annual rate of 2.9 per cent and total 1.6billion tonnes in 2019. Existing producers are expected to increasetheir market shares over the period by either starting new mines orexpanding production at existing ones. The increase in high quality,low cost iron ore in the market will be partially offset by the closure ofhigher cost international producers as well as lower production inChina.

Iron ore importsChina is forecast to import a record 875 mil lion tonnes of iron ore in2014, up 7 per cent on 2013. However moderating steel productiongrowth has resulted in higher port stocks. In June 2014 port stocks ofiron ore reached a record-high levels at 106 million tonnes indicatingthat although Chinas imports are increasing, a large portion of thisadditional supply is going to inventory.

Chinas domestic iron ore industry is also reporting higher oreproduction in 2014, yet lower industry profitability and an increase inthe number of loss-making firms suggest the iron content of

production may not actually be higher. These profitability measuresalso indicate the local iron ore industry is coming under increasingpressure in China and more mine closures are likely in the nearterm. The number of iron ore miners in China reporting a loss hasincreased from 17 per cent in June 2013 to 21 per cent in June 2014.While there is ev idence that many have been successful in cuttingcosts and some newer, low cost mines have started up, the domesticiron ore industry looms as a test case for the governments desire toimplement market based reforms across the economy and supportlocal industries and employment.

200

400

600

800

1000

1200

1400

1600

1800

2012 2013 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

Figure 3.5: World iron ore import destinations

China Japan European Union 28 Rest of world Korea, Rep. of

Mt

f BREE forecast. zBREE projectionSources: BREE; UNCTAD.

15

30

45

60

75

90


Figure 3.6: China iron ore import volumes

Australia Brazil other

Mt

Source: Bloomberg.

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f BREE forecast. zBREE projectionSources: BREE; World Steel Association.

Table 3.2: World iron ore exports(Mt)

2012 2013 f 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

Australia 492 579 707 768 846 861 886 900

Brazil 327 330 362 388 410 444 489 489

India (net exports) 16 9 12 22 25 24 23 21

Canada 35 36 37 32 28 25 25 25

South Africa 54 48 48 45 41 36 31 27

World iron ore trade 1 154 1 225 1 328 1 384 1 455 1 515 1 562 1 586

Table 3.1: World iron ore imports(Mt)

2012 2013 f 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

European Union 28 121 128 125 124 126 126 126 127

Japan 131 136 135 136 137 136 135 133

China 745 820 875 933 970 1020 1075 1120

Korea, Rep. of 66 63 63 64 65 65 66 67

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In 2015 Chinas iron ore imports are forecast to increase a further6.6 per cent and to total 933 million tonnes. Chinas steel producersare likely to continue facing challenging operating conditions with lowdemand growth and overcapacity keeping downwards pressure onprices in the short term. As a result they are expected to switchincreasingly to the lowest cost raw materials available in the marketwhich is imported iron ore. In both the short and medium term,imports of iron ore from Australia and Brazil are expected to fill a

greater share of Chinas domestic iron ore requirements.Over the period 2015 to 2019, Chinas iron ore imports are projectedto increase at an average annual rate of 4.7 per cent to total 1.12billion tonnes in 2019.

Japans imports of iron ore are projected to contract slightly over theoutlook period, decreasing by an average 0.3 per cent a year to total133 mill ion tonnes in 2019. A projected decrease in Japans steelproduction is expected to reduce demand for iron ore. South Koreasiron ore imports are projected to increase at an average annual rateof 1 per cent and 67 million tonnes in 2019.


2

4

6

8

10

12

14

South Africa Iran Ukraine Peru Chile

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14

Sources: Bloomberg; AME.

Figure 3.9: China other iron ore import sources and CFR costs

Mt

US$97

US$85

US$105

US$94 US$114

3

6

9

12

15

18

21

24

27

50

100

150

200

250

300

350

400

450

Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14

Figure 3.7: China domestic iron ore production

Iron ore production Per cent of loss making f irms (rhs)

%Mt

Source: CEIC.

20

40

60

80

100

120

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Apr12

Jul12

Oct12

Jan13

Apr13

Jul13

Oct13

Jan14

Apr14

Jul14

Figure 3.8: China port inventories

Mt

Source: Bloomberg.

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Iron ore exports

World iron ore exports are projected to surge in coming years as thesubstantial investments made in new capacity come online. In

Australia over 200 million tonnes of new capacity has already startedproduction and further expansions are planned. Combined withsimilar expansions that are also under construction in Brazil , theshare of world exports from existing large producers is projected toincrease in the medium term.

In 2014Australias iron ore exports are forecast to increase 22 percent to 707 mill ion tonnes. The increase is expected to be providedby the completion of expansions in production and infrastructurecapacity in the Pilbara. In 2015 Australias iron ore exports areforecast to grow by 8.6 per cent to 768 million tonnes, supported byinitial production at Roy Hill, which at capacity is expected toproduce 55 million tonnes a year of high grade iron ore. Lower ironore prices are unlikely to affect most Pilbara based producers thattypically have low production cost and sufficient resources towithstand increased price competition. Over the next five years

Australias iron ore exports are projected to grow at an averageannual rate of 5 per cent and total 900 million tonnes in 2019.

Brazils iron ore exports are forecast to grow by 10 per cent to 362million tonnes in 2014. In the medium term Brazils exports areprojected to average 6 per cent growth and increase to 489 milliontonnes in 2019. Export growth is expected to come from expansionsto existing mines and the completion of Vales 90 million tonnecapacity Serra Sul mine in the Carajas region. Vale expects thedevelopment of its Serra Sul mine along with increased use of theValemax bulk freighter to double its shipments to China in the next

five years.

Indias exports of iron ore are estimated to grow by 29 per cent in2014 to 12 mill ion tonnes. Over the remainder of the outlook periodIndias exports are projected to remain subdued and total 21 milliontonnes in 2019. In April Indias Supreme Court lifted a ban on miningin Goa and Karnataka (Indias largest iron ore producing regions).While exports have begun, production still faces legal obstacles asoutput is restricted to 20 million tonnes a year until other regulatoryhurdles have been cleared.


200

400

600

800

1000

1200

1400

1600

1800

2012 2013 f 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

Figure 3.10: World iron ore export sources

Australia Brazil Rest of world India (net exports) South Africa

Mt

f BREE forecast. zBREE projectionSources: BREE; UNCTAD.

100

200

300

400

500

600

700

800

900

1000

1995 1998 2001 2004 2007 2010 2013 2016 z 2019z

Figure 3.11: Australia annual iron ore production

Sources: Company Reports; BREE.

Mt

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Exports from other iron ore producing countries, including Ukraine,South Africa and Iran are projected to decrease due to increasedprice competition over the medium term. Higher production costs willreduce the competitiveness of producers in these countries andduring the troughs of the price cycle their viability in the market islower than the low cost iron ore f rom Australia and Brazil.

Production at Simandou, one of the worlds largest sources ofuntapped iron ore, in Guinea is not expected to significantly impact

world trade in iron ore over the outlook period. Difficulties withdeveloping essential infrastructure and the mine are expected tocontribute a delay in the first shipment of iron ore. The downwardtrend in prices is also unlikely to be supportive of a positive finalinvestment decision. Due to the projects substantial capital cost itsincentive price exceeds projected prices in the medium term.

Australian exports

Iron ore exploration expenditure fell 27 per cent in the June quarterrelative to the same period in 2013. This is in l ine with a significant

increase in Australian supply and lower iron ore prices. Based onprojected prices, iron ore exploration expenditure in Australia is notexpected to rebound in the medium term.

Investment in iron ore mine capacity and infrastructure has come offits record high levels in recent years but there remains considerableinvestment potential. Hancock Prospectings Roy Hil l project hascommenced construction in 2014 and Baosteelsacquisition of

Aquila Resources may support the development of the West Pilbarairon ore project.

In 2013-14 Australias iron ore export volumes increased by 24 percent to 652 million tonnes. The surge in exports was supported byrecord production from Pilbara mines with Rio Tinto, BHP andFortescue Metals Group all posting record high shipments. Exportvalues increased 31 per cent to $74.8 billion in 2013-14,underpinned by a combination of higher volumes, a more favourableexchange rate and higher prices in the first half of the financial year.


25

50

75

100

125

150

175

200

50

100

150

200

250

300

350

400

Jun 09 Mar 10 Dec 10 Sep 11 Jun 12 Mar 13 Dec 13

Figure 3.12: Australia iron ore exploration

Iron ore exploration in Australia Iron ore FOB Australia (rhs)

Sources: ABS; Bloomberg.

A$m US$/t

20

40

60

80

100

200

400

600

800

1000

199899 200203 200607 201011 201415 201819

Figure 3.13: Australias iron ore exports

volume value (rhs)

Sources: ABS; BREE.

Mt

2014-15A$b

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In 2014-15, Australias iron ore export volumes are forecast toincrease by a further 13 per cent and to total 735 million tonnes.Debottlenecking initiatives and higher production from existing mineswill support this growth. Iron ore export values are forecast todecrease 4.2 per cent in response to lower prices.

Over the medium term Australias iron ore export volumes areprojected to increase at an annual rate of 6 per cent and total 889million tonnes in 2018-19. This increase will be supported by the

opening and ramp up to full production of Hancock ProspectingsRoy Hill project, which is expected to begin operations in late 2015.The big three producers in the Pilbara Rio Tinto, BHP Billi ton andFortescue Metals Group, are all projected to deliver furtherproduction increases as they move to reduce the f ixed overheadcosts of their established infrastructure networks by increasingvolumes transported on them.


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Table 3.3: Iron ore outlook

unit 2013 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

orld

Prices b

Iron ore c

nominal US$/t 125.8 93.6 94.3 89.8 91.5 93.2 94.6

real d US$/t 128.0 93.6 92.4 86.3 86.2 86.1 85.7

201213 201314 201415 f 201516 z 201617 z 201718 z 201819 z

Australia

Production

Iron and steel gs Mt 4.85 4.53 4.33 4.29 4.25 4.21 4.17

Iron ore Mt 555.5 678.0 764.8 846.9 879.0 902.4 917.9

Exports

Iron and steel gs Mt 0.99 0.87 0.85 0.81 0.80 0.79 0.78

nominal value A$m 820 724 687 664 652 645 639

real value h A$m 864 743 687 648 623 603 584

Iron ore Mt 527.0 651.5 735.3 818.3 850.5 874.1 889.7

nominal value A$m 57 075 74 824 71 689 78 718 81 368 86 198 88 112

real value h A$m 60 129 76 844 71 689 76 798 77 674 80 514 80 531

b fob Australian basis c Spot price, 62% iron content basis. d In current calendar year US dollars. e Contract price assessment for high-quality hard coking coal. g Includes allsteel items in ABS, Australian Harmonized Export Commodity Classification, chapter 72, Iron and steel, excluding ferrous waste and scrap and ferroalloys. h In current financialyear Australian dollars.

f BREE forecast. s BREE estimate. z BREE projection.Sources: BREE; ABS; World Steel Association; UNCTAD.

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Metallurgical coalKate Penney

Metal lurgical coal prices have decl ined in respo nse to

oversupply and reduced import demand from China stemming

from the cycl ical dow nturn in the real estate sector. The market

balance is expected to tighten from 2016 as Chinas real estatesector recovers and the closure of unp rofi table mines reduces

supply avai labi l i ty.

Prices

Metallurgical coal spot prices declined steadily over the f irst eightmonths of 2014 in response to a combination of increased supplyand lower import demand from China. Steel making raw materialprices have been adversely affected by the sustained downturn in

Chinas real estate sector. Unlike steel and iron ore prices,metallurgical coal prices have been less volatile because the marketis relatively less oversupplied. Low volatility hard coking coal CFRChina averaged US$128 a tonne between January and August, 21per cent lower than the corresponding period in 2013.

Australian benchmark contract prices for high-quality metallurgicalcoal delivered in the September quarter settled at US$120 a tonne,unchanged from the June quarter. For 2014 as a whole, contractprices are forecast to average US$126 a tonne.

Many metallurgical coal operations are unprofitable at prevailingprices. As a result, some companies have opted to reduce or closecapacity or change their product mix to produce more thermal coal.However, it is likely to take some time before these announced cutsmaterialise. Further, weakness in Chinese real estate is assumed topersist throughout most of 2015 preventing any rapid recovery inprices. Metallurgical coal contract prices are forecast to decline by2.6 per cent to average US$123 a tonne in 2015.

110

160

210

260

310

360

410

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

US$/t

Figure 4.1: Metallurgical coal spot prices

Prem Low Vol HCC CFR Low Vol PCI CFR Semi Soft CFR

Source: Bloomberg.

100

200

300

400

1999 2003 2007 2011 2015 2019

2014US$/t

high qua li ty hard coking semi-so ft cokingSource: BREE.

Figure 4.2: Metallurgical coal benchmark prices, FOB Australia


Fi 4 3 G h i ll i l l

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f BREE forecast. zBREE projectionSources: BREE; IEA.

Table 4.1: Metallurgical coal trade 2013 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

Imports (Mt)

European Union 28 42 40 41 42 42 44 45

Japan 54 55 55 55 54 52 52

China 77 90 95 100 101 102 103

South Korea 31 32 32 32 32 32 33

India 38 43 43 43 44 45 46

Exports (Mt)

Australia 170 181 187 186 191 193 196

Canada 33 34 34 35 35 35 36

United States 60 58 57 56 53 51 48

Russia 22 13 13 13 13 13 13

World trade 302 318 324 330 331 335 337

From 2016, the market balance is expected to tighten as Chinasreal estate sector begins to recover and a prolonged period ofoversupply comes to an end through the closure of high-costoperations. The metallurgical coal contract price is projected to risemodestly to US$130 a tonne (in 2014 dollar terms) by 2019.

Consumption and trade

Trends in world metallurgical coal use will be shaped bydevelopments in steel consumption patterns and plans for steelproduction. Growth in world metallurgical coal use over the pastdecade has been driven by developing economies, largely Chinaand India where steel use and production has been expandingrapidly. Conversely use in more developed economies has beenmore subdued. -4

-2

2

4

6

8

10

12

14

EuropeanUnion 28

UnitedStates

China Japan South Korea India

%

Figure 4.3: Growth in metallurgical coal use

1983-1993 1993-2003 2003-2013Source: IEA.

Fi 4 4 M j t ll i l l i t

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50

100

150

200

250

300

1999 2004 2009 2014 2019

Mt

Figure 4.4: Major metallurgical coal importers

European Union 28 Japan South Korea China India

Sources: IEA; BREE.


50

100

150

200

250

300

350

1999 2004 2009 2014 2019

Mt

Figure 4.5: Major metallurgical coal exporters

Australia Canada US RussiaSources: IEA; BREE.

World trade of metallurgical coal is forecast to increase by 5 per centto 318 million tonnes in 2014, with China accounting for most of thegrowth in import demand and Australia the bulk of exports.

In line with projected moderate growth in steel production, worldtrade in metallurgical coal is projected to increase at an averageannual rate of 1.0 per cent to 337 million tonnes in 2019.

World imports

Chinas imports of metallurgical coal are projected to increase at anaverage annual rate of 2.7 per cent to 103 million tonnes in 2019,underpinned by increased steel production. While China is by far theworlds largest producer of metallurgical coal, domestic output istypically higher cost and lower quali ty than imported coal.

Indias plans to expand steel production capacity to support growingsteel-use as investment in infrastructure increases are expected totake time to implement. India has some metallurgical coalproduction, but is likely to rely mostly on imports to meet growingdemand over the medium term. Indias imports of metallurgical coalare projected to increase steadily to 46 million tonnes in 2019.

Imports into the European Union and South Korea are projected toincrease to 45 million tonnes and 33 mill ion tonnes by 2019,respectively while Japans imports are projected to decline to 52million tonnes.

World exports

Lower prices and high operating costs have removed the incentive toinvest heavily in developing new capacity around the world. As such,there is unlikely to be any significant additions to supply fromemerging producers and growth in exports f rom existing producers isprojected to remain subdued.

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Exports from Canada are projected to increase to 36 mill ion tonnesby 2019, while Russias exports are projected to remain stable at 13million tonnes. By contrast, exports from the US are projected todecline by 3.7 per cent a year to 48 million tonnes in 2019. The US isexpected to use more production domestically, supported by aprojected expansion in steel production.

Most of the growth in world metallurgical coal exports is expected tocome from Australia. Australias metallurgical coal exports are

projected to increase at an average annual rate of 1.6 per cent to196 million tonnes in 2019.

Australias export volumes and values

Australias metallurgical coal production increased by 16 per cent to184 mill ion tonnes in 2013-14 supported by the completion of newcapacity including BHP Billiton Mitsubishi Alliances (BMA) CavalRidge and Peabody Energys North Goonyella expansion.Production was also boosted by companies seeking to reduce unit

costs by increasing output.

Over the medium term, Australias production of metallurgical coal isprojected to rise at a more modest 1.2 per cent a year to 198 milliontonnes in 2018-19 as additions to capacity are partially offset by theclosure of mines that are no longer economic or have exhaustedtheir resources. High costs, a strong Australian dollar and lowerprices have increased pressure on the industry to continue to cutcosts and close mines.

Despite these pressures, a number of new proje

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