World steel consumption is forecast to grow by 6 per cent to 1.40 billion tonnes in 2008 and by a further 5 per cent to 1.47 billion tonnes in 2009. Supporting the forecast growth in global steel production will be continued robust economic growth in non-OECD Asia (that is Asia excluding Japan and the Republic of Korea). Economic growth in non-OECD Asia is assumed to be 7.7 per cent in 2008 and 7.4 per cent in 2009.

Steel consumption in China is expected to continue its strong expansion, as steel-intensive industries (such as automobile manufacturing, electrical appliances and construction) are expected to grow in line with rising incomes and infrastructure spending. China is forecast to account for about 60 per cent of the increase in global steel consumption in 2008 and 2009.

Steel consumption growth in the United States is forecast to be flat in 2008 and 2009 mainly because of tightening credit market conditions which have reduced construction activity. US steel consumption is also being adversely affected by greater import competition for manufactured products from developing countries, particularly in Asia. The recent strengthening of the US dollar against most major currencies is assumed to continue in 2009, leading to increased import competition.

Steel consumption in Europe is forecast to grow at an average annual rate of 3 per cent in 2008 and 2009. However, growth across the continent is expected to be uneven. Steel consumption in the European Union is forecast to grow slowly (1.1 per cent a year) because economic growth in some of the larger member states, such as Germany and Italy, is expected to be relatively weak. On the other hand, steel consumption in transition economies, such as the Russian Federation, is expected to grow strongly. Contributing factors to this growth include the rapidly expanding oil and gas sector, the replacement of ageing infrastructure, and strong growth in household incomes flowing through to higher demand for housing and steel intensive manufactured goods, such as automobiles and household appliances.

World steel production is forecast to grow by 6 per cent to 1.42 billion tonnes in 2008 and a further 5 per cent to 1.50 billion tonnes in 2009.

Strong growth in world steel production is being driven by China’s industrialisation, with Chinese steel production forecast to increase by 10 per cent in both 2008 and 2009 to 537 million tonnes and 591 million tonnes, respectively. This means China is expected to account for two-thirds of the increase in global steel production in 2008 and 2009.

Steel production is also forecast to grow rapidly in transition economies, including the Russian Federation and the Ukraine, at an average of around 5 per cent a year. Growth in steel production in these countries can be attributed to their transition toward market-based economies that has led to increased private investment in steel-making facilities and improved efficiency.

In contrast, steel production in Japan, the United States and the European Union is forecast to rise by a combined total of 9 million tonnes (or 2 per cent) in 2008 and 3 million tonnes (or 1 per cent) in 2009. Weak growth in steel production in these regions reflects the weaker economic growth assumed in the short term and a longer term trend of steel production facilities relocating from developed countries to lower cost developing regions.

Global iron ore production is forecast to grow by 13 per cent in 2008 to 1.9 billion tonnes and a further 12 per cent in 2009 to 2 billion tonnes. Most of this increase is expected to occur in China, Australia and Brazil.

China’s iron ore production in the first seven months of 2008 increased year on year by 20 per cent and is forecast to increase by 16 per cent to 384 million tonnes (adjusted to world average iron content) for the year as a whole. The slower growth during the remainder of 2008 reflects the Chinese Government’s ban on the transport of explosives from July 1 to October 8 to protect the Olympic Games. In 2009, China’s iron ore production is forecast to grow by 10 per cent to around 430 million tonnes. The forecast large production increases in 2008 and 2009 are the result of investment in new production capacity in response to significant price increases over the past several years.

Despite the increase in domestic iron ore production, China will still require large increases in imports to meet demand from its growing steel industry. China’s iron ore imports are forecast to rise by 16 per cent in 2008 to 445 million tonnes and by a further 10 per cent to around 490 million tonnes in 2009.

The volume of Australian iron ore exports is forecast to grow by 23 per cent in 2008 to 329 million tonnes and by a further 15 per cent to 377 million tonnes in 2009.

The forecast increases in Australian exports in 2008 and 2009 reflect the start up of several iron ore projects. The largest is Fortescue Metals’ Pilbara project (capacity of 55 million tonnes a year) which commenced exports in May and has quickly ramped up production. Rio Tinto commissioned two projects in the second half of 2007, which will contribute to higher exports in 2008 and 2009. These are the 22 million tonne a year Hope Downs mine and the expansion of the Yandicoogina mine (additional 16 million tonnes a year). BHP Billiton’s Rapid Growth 3 project (additional 20 million tonnes a year) was completed in late 2007 and will also add to production and export volumes as it increases output.

Iron ore exports from Brazil are forecast to increase by 14 per cent to 306 million tonnes in 2008 and by a further 13 per cent to 346 million tonnes in 2009. Increases in Brazil’s exports are being driven by capacity expansions, particularly at Vale’s Carajas operation.

Exports of iron ore from India are forecast to rise in 2008 as producers look to benefit from high spot prices in China. However, a combination of export taxes and inefficient infrastructure places Indian iron ore exporters higher up the cost curve relative to Australian and Brazilian exporters. With the increased availability of iron ore from Australia, Brazil and China, spot prices are expected to decline and exports of high-cost Indian iron ore should also decline. In addition, strong domestic demand in India and government policy aimed at restricting exports could reduce the availability of ore for export.

Metallurgical coal exports from the world’s major exporters are being constrained by infrastructure and weather-related supply disruptions. Australian metallurgical coal exports, which account for around 60 per cent of global metallurgical coal trade, decreased year on year by 2 per cent in the first half of 2008, mainly as a result of floods in Queensland’s Bowen Basin which forced the temporary closure of a number of mines. Congestion in Australia’s coal supply chains, particularly in relation to ports and rail, means the impact of these lost exports is unlikely to be fully offset over the remainder of 2008.

In 2009, world metallurgical coal trade is forecast to increase by 6 per cent to almost 250 million tonnes.

Rising metallurgical coal prices are also expected to provide an incentive for increased world production. In particular, China is increasing output to meet demand from its steel industry. Production and exports from North America and the Russian Federation are also expected to rise in response to significantly higher world prices. However, growth in these regions may be limited by port and rail capacity.

World demand for metallurgical coal is expected to rise strongly in 2008 and 2009 in line with growth in blast furnace output. World metallurgical coal consumption is forecast to grow by an average of 5.5 per cent a year in both 2008 and 2009 with China and India being the main drivers of growth.

Metallurgical coal imports are forecast to grow rapidly in India at an average of 12 per cent a year in 2008 and 2009. The forecast strong growth in India’s steel production and the low quality of domestic metallurgical coal reserves are expected to lead to an increased reliance on imports. China, on the other hand, has good quality domestic metallurgical coal reserves and, because of a tight global market, is expected to focus on increasing domestic production to satisfy demand.

Significant rises in iron ore and metallurgical coal prices and forecast increases in volumes shipped are expected to lead to substantial increases in Australia’s export earnings from these commodities.

In 2007-08, a 9.5 per cent increase in iron ore contract prices and a 14 per cent increase in volumes shipped are estimated to have led to iron ore export earnings totalling $20.3 billion, 31 per cent higher than 2006-07. However, because of the late settlement of contract prices, trade data for the June quarter do not yet include a significant proportion of price increases. Consequently, the 2007-08 export earnings figure is an under-estimate and will be subject to substantial upward revisions in coming months.

For 2008-09, an average 85 per cent rise in iron ore contract prices and a forecast 21 per cent rise in export volumes are forecast to lift export earnings to around $39 billion. This is an upward revision from ABARE’s June quarter forecasts mainly because of higher than expected price increases (ABARE’s earlier forecast was under the assumption of an average price rise of 80 per cent). Export shipments have also been revised upward because of a faster than expected ramp up in production from Fortescue Metals.

According to initial data from the Australian Bureau of Statistics, the value of metallurgical coal exports in 2007-08 increased by 5 per cent to $15.8 billion. Similarly, trade data for the June quarter do not include some recently settled contract price increases. As such, metallurgical coal export earnings in 2007-08 are likely to be subject to substantial upward revisions in coming months.

For 2008-09, a tripling of metallurgical coal prices and a forecast 7 per cent increase in export volumes will lead to metallurgical coal export earnings rising to around $44 billion.