World steel production is forecast to grow by 5.3 per cent to 1.42 billion tonnes in 2008 and a further 5.4 per cent to 1.49 billion tonnes in 2009. This overall strong growth in world steel production masks differences in production growth across regions. Steel production is expected to grow most rapidly in developing and transition economies, underpinned by their strong steel demand. In contrast, steel production in the United States and the European Union is expected to be weak because of lower demand associated with lower economic growth. Low steel production growth in the United States and the European Union also reflects the longer term trend of relocating steel production facilities from developed countries to the developing world.

As a result of the strong overall growth in world steel production, demand for steel-making raw materials, such as metallurgical coal and iron ore, is forecast to remain strong.

Global iron ore production is forecast to grow by 11 per cent in 2008 to 1.8 billion tonnes and a further 8 per cent in 2009 to 2 billion tonnes. Most of this increase is expected to occur in Australia, Brazil and China.

Iron ore production in China (adjusted to world average iron content) increased by 20 per cent in 2007 to 332 million tonnes, which now makes China the world’s second largest iron ore producer behind Brazil.

China’s production of iron ore is forecast to rise by a further 13 per cent to around 375 million tonnes in 2008 and by 9 per cent to around 410 million tonnes in 2009. The large increase in production is being driven by mining investment in response to high prices.
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 13 per cent in 2008 to 435 million tonnes and a further 12 per cent to around 490 million tonnes in 2009.

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 amount of iron ore becoming available from Australia, Brazil and China in the next two years, it is expected iron ore spot prices will decline in 2009 and exports of high-cost Indian iron ore will fall. In addition, strong domestic demand would suggest that iron ore is likely to be directed to India’s domestic markets rather than for export.

World metallurgical coal trade is forecast to increase by 3.0 per cent in 2008, limited by the flood damage in Queensland’s Bowen Basin early in the year. Australian metallurgical coal exports, which account for around 60 per cent of global metallurgical coal trade, fell by 6 million tonnes in the March quarter 2008 as a result of the floods. Congestion in Australia’s coal supply chains, particularly in relation to ports and rail, implies that a significant proportion of these lost exports is unlikely to be made up during the remainder of 2008.

In 2009, world metallurgical coal trade is forecast to increase by 7 per cent to around 250 million tonnes. An expected recovery in exports from Australia supported by increased production and infrastructure capacity will underpin the increase.

Rising metallurgical coal prices are also expected to provide an incentive for increased production elsewhere in the world. 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 continue rising 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 2008 and 2009 with China and India being the main drivers of growth.

Metallurgical coal imports are forecast to grow most rapidly in India at an average of 15 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 coal 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 15 per cent increase in volumes shipped are estimated to have led to iron ore export earnings totalling $20 billion, 32 per cent higher than in 2006-07. For 2008-09, a further rise in iron ore contract prices and a forecast 18 per cent rise in export volumes are expected to lift export earnings by 72 per cent to $35 billion.

Export earnings from metallurgical coal are estimated to have increased by 17 per cent in 2007-08 because of higher contract prices in the June quarter. Negotiated coal contract prices took effect for 12 months starting in April 2008 and the significantly higher negotiated prices in the June quarter are expected to more than offset lower contract prices that applied for the first three quarters, limited growth in export volumes and the stronger Australian dollar. For 2008-09, a tripling of metallurgical coal prices and an increase in export volumes, is forecast to lead to metallurgical coal export earnings more than doubling to around $39 billion.