abare.gov.au - Australian commodities – December quarter . volume 15 . number 4 2008

Energy and minerals overview

Trish Gleeson and Kate Penney

Earnings from Australian energy and minerals exports are forecast to increase by 37 per cent in 2008-09 to $160 billion supported by high contract prices for bulk commodities.

In line with global economic growth assumptions, demand for mineral and energy commodities is expected to pick up gradually in the second half of 2009.

China is still key to the speed of the turnaround in the energy and minerals commodities market, with the Chinese Government’s stimulus package expected to provide some support to the demand for resources in 2009.

Sharp falls in prices for energy and mineral commodities from record highs in July have resulted as the global financial crisis has enveloped a number of OECD countries, adversely affecting world economic growth prospects. Economic activity in many OECD countries is expected to continue to contract for the next few quarters affecting demand from commodity-intensive industries.

Australia’s earnings from energy and minerals exports supported by bulk commodity contracts in 2008-09

Combined earnings from Australian energy and minerals exports are forecast to increase by 37 per cent in 2008-09 to $159 billion. The forecast increase mainly reflects the effects of high contract prices for bulk commodities in place until the end of March 2009. Also, the recent depreciation of the Australian dollar has limited the effect of declining commodity prices (most traded in US dollar terms) on energy and mineral resource export earnings. Earnings from iron ore, coal, gold and LNG are forecast to account for most of the growth in total energy and mineral export earnings in 2008-09. However, built into the forecasts of export earnings for bulk commodities is an assumption of reduced contract prices negotiated for Japanese fiscal year 2009-10 (April to March) which will affect export returns in the final quarter of 2008-09.

For energy commodities, export earnings are forecast to increase by 77 per cent to $80.8 billion, supported by the increased value of metallurgical coal, thermal coal and LNG exports. Metals and other non-energy minerals are forecast to contribute $78.3 billion (an increase of 11 per cent) to Australian export returns in 2008-09. The value of iron ore exports is forecast to increase by 52 per cent to $31.0 billion, while the value of gold exports is forecast to increase by 37 per cent to $14.9 billion.

Recovery in demand for energy and minerals commodities expected in 2009

World economic growth is assumed to remain weak over the next few quarters before turning around in the second half of 2009, with a gradual recovery strengthening towards the end of the year. In line with these economic growth assumptions, global demand for energy and minerals commodities is expected to remain weak for the next few quarters, placing further downward pressure on world prices, before commencing a gradual recovery in the second half of 2009.

China’s continuing demand for mineral and metal commodities is key to the speed of turnaround in commodities markets.

An economic slowdown is already underway in China. After years of double-digit economic growth, construction, steel demand, electricity consumption and car sales have all been falling in recent months affecting demand for energy resources, minerals and metals.
With a slowing economy, production of steel in China has slowed. Therefore, demand for iron ore and coal has also slowed, with stockpiles of both accumulating.

While there are signs external demand for China’s exports is weakening, strong domestic demand, including that generated by higher public spending, has the potential to provide support to economic growth in the short term, with falling commodity prices also providing support to manufacturing activity.

In particular, the Chinese Government’s 4 trillion yuan (US$586 billion) stimulus package announced in early November is expected to have a positive effect on resource intensive sectors and, hence, on China’s demand for minerals and energy commodities. The package is intended to stimulate economic growth and employment through spending on infrastructure projects — such as railways, roads, airports and the power grid — and tax cuts for exporters. It also includes funds for reconstruction of the earthquake-damaged Sichuan province, health care, education and environmental protection measures. Spending will be spread over the next two years and will mostly involve accelerating projects already underway or starting construction which has already been approved under the current five-year plan (2006–2010). The effects of the package are expected to be felt in the first half of 2009.