Son of BREE drops an LSD tab

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The disbanding of BREE and folding of it into the Office of the Chief Economist has done nothing to repair the fundamental flaws in its analytical framework. In today’s quarterly update on the outlook for commodity prices the great bureaucratic dream weaver spins another wondrous future for Australia filled with unicorns and rainbows. It begins with iron ore:

CaptureIn 2016, the price of iron ore is forecast to fall a further 3 per cent to average US$51 (FOB). China’s steel production is forecast to contract further in 2016 while an additional 42 million tonnes of iron ore is forecast to be delivered to the seaborne market…In 2017, the price of iron ore is projected to increase to US$57.70 (in 2015 dollars, FOB) as demand growth accelerates and supply growth slows. Projected growth in world steel production in 2017 will support consumption of iron ore while industry consolidation is projected to remove some of the excess supply capacity. These factors are expected to support an increase in the price of iron ore to US$67.20 (in 2015 dollars, FOB) in 2020.

So, we are going to average $58 next year at the benchmark equivalent. And the price is going to keep climbing handsomely on the wings of the Pegasus to $75 by 2020. And these price rises are going to transpire even as global production soars:

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Pure fantasy.

Turning to gas, the drugs are still flowing:

Despite some concerns around the economic growth outlook, the prospects for Chinese gas demand remain strong. Gas is attractive as a means of reducing air pollution in major cities, and rapid urbanisation is driving strong residential sector consumption and uptake of gas in power generation…The precise split between pipeline and LNG supplies is difficult to predict, but given the overall level of gas demand and the level of indigenous gas production, it is expected there will be downward pressure on both pipeline and LNG supply contracts, and possible reloading or redirecting of LNG cargoes by over-contracted Chinese buyers. LNG imports should reach about 50 million tonnes by 2020, up from 20 million tonnes in 2014. This forecast is lower than previous forecasts due to the increasing competition from alternative supplies in China.

And at 17% growth is still high as a kite and way above market. Japan is also delusional:

Japanese energy policy has set a target of 20-22 per cent nuclear generation by 2030, and the share of gas generation is targeted to fall substantially from 43 per cent in 2013 to 27 per cent by 2030. This objective, when combined with the observation that total primary energy consumption in Japan has declined at 1 per cent a year since 2000, suggests that gas consumption could fall significantly in the longer term. It is difficult to say how these events will play out over the next five years. Even if a significant number of reactors are restarted, the initial impact will be to displace oil-fired generation. Therefore LNG imports are projected to fall marginally by 2 per cent over the next five years. This compares to a small increase of 3 per cent in the previous forecast.

It’s not that difficult given they’re telling you that they’re going to do it but it’s still not in the forecast. As such, BREE says LNG prices will rebound to $9.50mmBtu by 2020, when they are much more likely to be around half that on spot and still lower than the $67 Brent equivalent. But the addled outlook enables BREE to then deliver this:

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$50 billion in LNG revenue for Australia when it will be lucky to be half that, which is why LNG equity prices are being slaughtered. That in turn this marvel of Australia getting richer forever:

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I can’t go on. It is too depressing. Let’s just say that Son of BREE is having a party all on its own, man.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.