Resources and Energy Quarterly - June 2016

Resources and Energy Quarterly June 2016

Further Information

For more information on data or government initiatives please access the report from the Department’s website at:

www.industry.gov.au

Chapter Authors

Macroeconomic outlook: Mark Gibbons and Kristy Krautler

Resources and energy overview: Marco Hatt and Kate Penney

Steel and iron ore: Marco Hatt

Metallurgical and thermal coal: Nikolai Drahos

Gas: Gayathiri Bragatheswaran

Oil: Kieran Bernie

Uranium: Geoff Armitage

Gold and copper: Joseph Moloney

Aluminium, alumina and bauxite: Thuong Nguyen

Nickel and zinc: Karan Sharma

Acknowledgements

The authors would like to acknowledge the contributions of:

Ross Lambie

Nicole Thomas

Allison Ball

David Whitelaw

Inja Ahn

Laura Jones

Katya Golobokova

Cover image source: Shutterstock

© Commonwealth of Australia 2016

ISSN 1839-5007 [ONLINE]

Vol. 5, no. 4

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced or altered by any process without prior written permission from the Australian Government. Requests and inquiries concerning reproduction and rights should be addressed to:

Department of Industry, Innovation and Science, GPO Box 9839, Canberra ACT 2601 or by emailing

Creative Commons licence
With the exception of the Coat of Arms, this publication is licensed under a Creative Commons Attribution 3.0 Australia Licence.
Creative Commons Attribution 3.0 Australia Licence is a standard form license agreement that allows you to copy, distribute, transmit and adapt this publication provided that you attribute the work.

A summary of the licence terms is available from: http://creativecommons.org/licenses/by/3.0/au/deed.en

The full licence terms are available from: http://creativecommons.org/licenses/by/3.0/au/legalcode

The Commonwealth’s preference is that you attribute this publication (and any material sourced from it) using the following wording:
Source: Licensed from the Commonwealth of Australia under a Creative Commons Attribution 3.0 Australia Licence.

Contents

Forward

Executive summary

Macroeconomic outlook

Resource and energy overview

Steel

Iron ore

Metallurgical coal

Thermal coal

Gas

Oil

Uranium

Gold

Aluminium, alumina and bauxite

Copper

Nickel

Zinc

Trade summary charts

Appendix

Foreword

In the first half of 2016, prices for most construction and steel-making raw materials increased—most notably iron ore, metallurgical coal and copper—because of a resurgence in construction activity in China. Similarly, oil prices picked up in the June quarter as concerns about the outlook for global consumption abated to some extent, and unscheduled production outages in Canada and a number of OPEC economies relieved pressure on storage capacity.

Prices were highly variable during the first half of 2016, particularly for iron ore, led by speculative activity in futures markets. There are a number of factors that may continue to drive large price movements in the second half of 2016. These include uncertainty about the pace of China’s economic growth, the implications of the UK’s decision to withdraw from its European Union membership, ‘Brexit’, the outcome of the US election and the recent appreciation in the US dollar.

China’s economy is slowing as it transitions away from investment-led growth to consumption-led growth. While growth in most of China’s resource and energy imports are forecast to decline, China is expected to remain a key market for Australia.

The outlook for Australia’s energy exports is generally positive. Thermal coal imports into emerging economies are forecast to remain stable as lower imports into China are offset by higher imports from India and Southeast Asia. LNG imports are forecast to continue to increase robustly, driven by Asia and led by China.

Australian producers are well-placed to fulfil demand for resources and energy over the next eighteen months, despite difficult operating conditions. In particular, production of bulk commodities is forecast to increase, even as prices decline. As a result, Australia’s earnings from resources and energy exports are forecast to increase by 3 per cent to $163 billion in 2016–17.

Mark Cully
Chief Economist
Department of Industry, Innovation and Science

1.  Macroeconomic outlook

1.1  World economy

World economic conditions continued to weaken in the first half of 2016, leading to lower investor sentiment, particularly in Europe. Uncertainty about economic growth prospects increased in the lead-up and aftermath of the UK referendum—“Brexit” vote—when British citizens voted to withdraw from the European Union.

Currently, the IMF forecasts global economic growth to rise marginally from 3.1 per cent in 2015 to 3.2 per cent in 2016, and 3.5 per cent in 2017. These forecasts have been continually revised downwards since 2014. The forecasts that were released in April do not include any potential effects of the UK referendum on world growth. In advanced economies, growth is currently forecast to be modest, at around 1.9 and 2.0 per cent in 2016 and 2017, respectively. Emerging economies are forecast to grow by 4.1 per cent in 2016 and 4.6 per cent in 2017.

The risks to global economic prospects over the next eighteen months remain firmly on the downside. These include a slowdown in the growth of emerging economies, and uncertainty associated with the flow-on effects of the UK referendum, the outcome of the US election and the pace of China’s economic growth.

China remains the key source of potential risk to the global economic outlook, as it transitions towards a more consumer-based economic model. In addition, a reversal of the recent improvement in China’s housing market could result in downward revisions to its growth prospects and a significant reduction in construction activity.

1.2  Outlook for key economies

China

Economic growth in China continued to slow in early 2016. The economy expanded by 6.7 per cent in the March quarter, compared with last year—the lowest quarterly growth recorded since the March quarter 2009. In response to slowing growth concerns, the Chinese Government announced a series of new rail and road infrastructure projects to be undertaken through 2016. They are expected to be worth around 800 billion yuan (US$121 billion) and will support demand for construction materials.

Figure 1.1: Economic growth, by grouping

Figure 1.2: China’s residential activity

However, the housing sector (a key driver of construction materials) is undergoing some adjustment that raises uncertainty around future growth prospects of the sector.

The performance of the housing sector has varied across regions over the past couple of years. There is currently ample housing supply in smaller cities, leading local governments to introduce home-buying stimulus measures. By contrast, surging prices in larger cities such as Shanghai and Shenzhen have encouraged local governments to impose stricter criteria for homebuyers, and ban unregulated lending. These actions contributed to a reduction in the growth of new house prices in May.

There is also concern about national government debt. China’s current debt-to-GDP ratio is around 240–270 per cent, with increasing numbers of state-owned enterprises defaulting on their loans. These debt concerns have contributed to steady downward revisions to China’s projected growth rates. China’s economy is forecast to grow by 6.5 per cent in 2016 and 6.2 per cent in 2017.

India

India’s economy continued to grow strongly in early 2016. In the March quarter 2016, real GDP increased by 7.9 per cent year-on-year. During the quarter, investment continued to grow at a rapid pace, but industrial production growth slowed, up by only 0.1 per cent compared with a year earlier.

Poor infrastructure, because of a lack of access to financing, has limited economic growth in India. To address this, the Indian Government created the National Investment and Infrastructure Fund (NIIF) at the end of 2015. These efforts have been supported by initiatives and support from other national governments. The Qatar Investment Authority recently signed an agreement to facilitate the study of investment opportunities in India. In addition, Russia has created a joint fund with the NIIF, with Japan and Britain also showing interest.

Construction growth increased by 3.9 per cent in the March quarter 2016. As new projects are implemented with support from the NIIF, the use of construction materials, such as steel and copper, are expected to increase.

Figure 1.3: India’s construction and manufacturing gross value added

Manufacturing activity increased by 9 per cent in the March quarter 2016, compared with a year earlier. However, the sector is still facing several challenges that are preventing it from reaching growth targets that have been set for the sector by the government. Poor infrastructure, and regulation in labour markets and land acquisition increase the cost of production for manufacturers. This makes it harder for Indian manufacturers to keep costs low and expand the manufacturing sector. It also makes it difficult for Indian firms to compete with other global manufacturing giants.

Despite these issues, India’s economy is forecast to increase by 7.5 per cent in both 2016 and 2017. This assessment is based on an expected recovery in private investment, stronger industrial activity and increasing private consumption due to lower energy prices and higher real incomes.

Japan

Japan’s economy continued to weaken in early 2016. Real GDP grew by 0.4 per cent in the March quarter 2016, 1.0 percentage point lower than in the March quarter 2015. Falling investment was a major detractor from growth during the March quarter.

Despite an improvement in household consumption in the March quarter, it continued to remain weak—retail sales growth fell 0.8 per cent through the year to April 2016. In response to these concerns, the Japanese government announced a second supplementary budget of up to US$90 billion dollars, to be presented after the Upper House elections in July. The budget is intended to fund public works projects, building on an earlier US$7 billion dollar budget to finance reconstruction works after the earthquakes in southwestern Japan in April.

This additional spending comes on top of ongoing efforts to raise growth and address deflation. These ongoing efforts, which include a negative cash rate for some commercial deposits at the Bank of Japan, have failed to lift core inflation, which was –0.3 per cent in April 2016. The weakness in Japan’s growth prospects have led to a delay in the planned sales tax increase, from April 2017 to October 2019.

The outlook for economic growth in Japan remains subdued. Economic growth is forecast to remain at 0.5 per cent in 2016 and decline by 0.1 per cent in 2017.

South Korea

The South Korean economy performed below expectations in the March quarter 2016, growing by 0.4 per cent. Monthly industrial output fell 1.3 per cent in April 2016, and was 2.8 per cent lower compared with a year earlier due to weak exports and corporate restructuring of shipbuilders, which affected domestic demand and business sentiment. Private consumption fell by 0.3 per cent in the March quarter 2016 because of lower household incomes.

South Korea is an export reliant economy. If global economic conditions remain weak, as forecast by the IMF, this could have a negative effect on South Korea’s growth, particularly in the manufacturing sector.

Figure 1.4: Japan’s GDP and retail sales

Figure 1.5: South Korea’s trade price indices

Ongoing weakness in China raises particular concerns for South Korea because it reduces China’s imports of South Korean goods, and imports from countries that rely on Chinese commodity demand. China’s excess capacity in manufacturing is also putting further downward pressure on South Korea’s exports.

The Bank of Korea cut interest rates by 25 basis points to a historic low of 1.25 per cent in June. This is the first cut since June 2015. The cut is a pre-emptive move to better cope with risks to growth in the second half of 2016, such as weak exports, low domestic demand, and corporate restructuring. South Korea’s economy is forecast to grow by 2.7 per cent in 2016, and 2.9 per cent in 2017.

United States

The US outlook has deteriorated slightly, but remains positive. Conditions in the US labour market remain strong and should support consumption growth over the remainder of 2016 and into 2017. US interest rates are very low and are expected to remain low for the rest of the year.

In April, the increase in consumer spending was the largest recorded in more than six years, driven largely by increased automobile purchases. When adjusted for inflation, consumer spending increased 0.6 per cent, the biggest gain since February 2014. Nonetheless, consumer confidence decreased slightly. Consumers remain cautious about the outlook for business and labour market conditions. Consumers expect little change in economic activity in the coming months but continue to expect incomes to increase. Personal income increased 0.4 per cent in April with wages and salaries increasing 0.5 per cent.

Economic growth in the US is forecast to increase by 2.4 per cent in 2016. Improving housing market conditions are expected to help offset falling exports stemming from strength in the dollar and slow growth in its major trading partners. In 2017, the US economy is forecast to grow by a further 2.5 per cent.

Figure 1.6: US personal consumption expenditure and income

Europe

Preliminary estimates of Eurozone real GDP growth indicate the region’s economy grew by 0.6 per cent in the March quarter 2016, or 1.7 per cent year-on-year. This result is the highest since the beginning of 2011 and was driven by stronger household spending and business investment, as well as a slight increase in exports. Of the largest economies, the top performers in the March quarter were Spain—growing 0.8 per cent, Germany—growing 0.7 per cent, and France—growing 0.6 per cent. The Greek economy remained weak, and its quarterly growth rate declined by 0.5 per cent.

Despite these positive figures, global uncertainties, weak consumer confidence and sluggish exports continue to put downward pressure on future growth prospects.

The European Union is forecast to grow by 1.8 per cent in 2016 and 1.9 per cent in 2017.

9

Table 1.1: Key world macroeconomic assumptions

Per cent / 2013 / 2014 / 2015 / 2016 a / 2017 a /
Economic growth b
Advanced economies / 1.2 / 1.8 / 1.9 / 1.9 / 2.0
United States / 1.5 / 2.4 / 2.4 / 2.4 / 2.5
Japan / 1.4 / –0.0 / 0.5 / 0.5 / –0.1
European Union 28 / 0.3 / 1.4 / 2.0 / 1.8 / 1.9
Germany / 0.4 / 1.6 / 1.5 / 1.5 / 1.6
France / 0.7 / 0.2 / 1.1 / 1.1 / 1.3
United Kingdom / 2.2 / 2.9 / 2.2 / 1.9 / 2.2
South Korea / 2.9 / 3.3 / 2.6 / 2.7 / 2.9
New Zealand / 1.7 / 3.0 / 3.4 / 2.0 / 2.5
Chinese Taipei / 2.2 / 3.9 / 0.7 / 1.5 / 2.2
Emerging economies / 4.9 / 4.6 / 4.0 / 4.1 / 4.6
Non-OECD Asia / 6.9 / 6.8 / 6.6 / 6.4 / 6.3
South East Asia d / 5.1 / 4.6 / 4.8 / 4.8 / 5.1
China e / 7.7 / 7.3 / 6.9 / 6.5 / 6.2
India / 6.6 / 7.2 / 7.3 / 7.5 / 7.5
Latin America & Caribbean / 3.0 / 1.3 / –0.1 / –0.5 / 1.5
Middle East / 2.1 / 2.6 / 2.3 / 2.9 / 3.3
World c / 3.3 / 3.4 / 3.1 / 3.2 / 3.5
Inflation rate b
United States / 1.5 / 2.2 / 0.1 / 1.1 / 1.8

Notes: a assumption; b change from previous period; c weighted using 2012 purchasing power parity (PPP) valuation of country gross domestic product by IMF; d Indonesia, Malaysia, Philippines, Thailand and Vietnam; e excludes Hong Kong