Commodity exports to the moon!

By Leith van Onselen

The Bureau of Resources and Energy Economics (BREE) released its Resources and Energy Quarterly—March quarter 2012 (report below) yesterday, which provides a bullish outlook for Australian commodity exports. From the press release [my emphasis]:

Australia’s resources and energy commodity export earnings are forecast to continue to grow over the medium term to reach a record $225 billion (in 2011–12 dollars) in 2016–17…

The growth in resources and energy export earnings over the next five years is forecast to be underpinned by increases in export earnings for most commodities, including LNG, iron ore and thermal coal.

‘Despite projections of lower commodity prices relative to 2010–11 over the medium term, increased resources and energy export earnings are projected to be underpinned by substantially greater export volumes for most commodities’ said Professor Grafton, BREE’s Executive Director and Chief Economist, on releasing the report.

A large proportion of increases in export earnings are expected to come from LNG, with eight projects (including the almost complete Pluto project) under construction. Export volumes are forecast to increase from 20 million tonnes in 2011–12 to over 60 million tonnes in 2016–17, while export earnings for LNG are also forecast to treble over the same period to $30 billion.

‘The growth in Australia’s LNG industry over the next five years is underpinned by over $175 billion worth of investment to expand capacity in Western Australia, Queensland and the Northern Territory,’ said Professor Grafton.

Between 2011–12 and 2016–17 export volumes are forecast to increase for iron ore (62 per cent), metallurgical coal (47 per cent), thermal coal (65 per cent), copper ores and concentrates (77 per cent) and alumina (29 per cent).

‘The increase in Australia’s export volumes for most commodities reflects commitments by the industry to increase production and expand infrastructure capacity over the medium term,’ said Professor Grafton.

The BREE’s forecasts are good news for the Australian economy. The economy’s concentration of merchandise export earnings in just three goods – iron ore, coal and natural gas – has served Australia well over the past decade as the Chinese economy boomed and, according to the BREE’s forecasts, our good fortune will continue.

Most of the assumptions underpinning the BREE’s analysis are reasonable. The growth projections for the OECD are rightly subdued. However, it is emerging markets that underpin commodity demand and it is here that BREE’s analysis starts to look a little heroic.

First of all, the BREE predicts China to grow at 8.8% annually from 2013 to 2017 – faster than the Chinese authorities own growth target of 7.5%. That might be defensible given the Chinese have outperformed their own growth targets for the past several years, but not during a now widely accepted structural adjustment to internal demand. The BREE also forecasts world growth to accelerate to 4.1% in perpetuity:

I know that officials need these projections around which to plan but there is little risk built into such growth rates.

Then there are the BREE’s price and volume assumptions, which appear equally optimsitic, with a smooth moderation in bulk commodity prices expected:

Despite a massive lift in export volumes, which implies large waves of new supply:

As I’ve argued before, economics 101 tells us that markets defined by constrained supply are prone to boom and bust cycles. Those that also have a delayed supply response, such as iron ore, tend to be more volatile still. But for the BREE report, prices diminish only moderately even as export volumes boom and thus export earnings are forecast to have a smooth upwards trajectory:

The one unquestionably positive story in the BREE release is that of gas with, as the table above shows, a trebling of LNG export earnings to $30 billion. This is based on the real story of today’s huge gas investments in WA and QLD:

As of February 2012, 14 liquefaction projects were committed or under construction around the world, eight of which are located in Australia. Australia LNG liquefaction capacity is projected to increase four fold over the outlook period to total 85 million tonnes in 2017. Most of this additional capacity is scheduled to come online after 2014.

That’s some pretty eye-popping factoids and will undoubtedly support the Australian economy’s balance of payments position into the future.

But there is still a question over BREE’s assessment of LNG price. The tripling in exports is met with little fall in the regional prices. That is again questionable given the price disparity that currently exists between North American gas and North Asian which is very likely to push our US and Canadian cousins to accelerate their push into highly profitable shale gas exports:

BREE itself admits that it does not yet incorporate any influence from such increased supply (though it offers a quite useful assessment of where current liquifaction plans are at, including 8 planned projects that would swamp Australian supply). And BREE analyst, Alan Copeland, appeared in The Australian today to outline this risk more fully, saying:

“The largest threat to the Australian LNG sector in terms of both export competition and price is from shale gas,” BREE analyst Alan Copeland said.

“Despite being distant from the growing Asian market, LNG exports from the US may be price-competitive with other suppliers into Asia because of low cost of feed gas and relatively low capital costs.”

…”Even allowing for liquefaction and transport costs, US LNG exports at this domestic price would be highly profitable, given the current Japanese import price of around $US16 to $US17,” Mr Copeland said.

…a host of new Australian projects yet to be ticked off could come under pressure and may find it hard to secure new contracts.

“You would have to assume if you were trying to line up Kogas (which is involved in Canadian LNG) or another Asian importer for a long-term contract that they would be looking at the US situation,” Mr Copeland said.

It’s a delicate dance this official forecasting.

[email protected]

www.twitter.com/Leithvo

BREE Resources & Energy Quarterly (March 2012)

Comments

  1. forecasting is always difficult. I thought that way too much was made of the recent announcements by BHP – it was old news really.

    Forecasts of income from Gas are difficult given the price volatility and abundance, but price will stabilise and perhaps increase in time as the end of easy oil becomes suddenly apparent to the world.

    Despite the gloomy forecasts here China will continue to buy our products and China will continue to be a strong source of cash flow for us as a nation.

    Talks of a hard landing have been largely overstated although any sane forecaster would expect some deviation from a straight line slowing.

    • I agree Peter, a hard crash landing for China is not a scenario – too big to fail, dramatically! Slow down yes, but it is a numbers game, 1.4 billion hungry communist capitalists who want our red earth!
      Booooom times – I just hope Julia & Swanny share the love from the MRRT well; not delay gratification for super – share the love baby!

        • I’m sorry Peter, but that’s just a list of assertions which are more faith than logic. You have to back up stuff like “Talks of a hard landing have been largely overstated” and “but price will stabilise and perhaps increase in time” with something, anything!

          I could equally say talk of a soft landing has been largely overstated, and global gas prices will collapse.

          They are just empty assertions.

          • Lorax, you are certainly right there, but isn’t that the case for all assertions about the future, other than cases where the science is straightforward and well known (ie not climate science!). It is all opinion. Some opinion seems to have more backing than other opinion (eg BREE, Phat Dragon and others whose job it is to forecast these things no doubt do a lot of research and analysis before releasing their forecasts, certainly more than anyone commenting here can do) but it is still opinion, to be taken with a grain of salt.

          • Lorax and Alex – all we have are opinions on China with some statistics that can be challenged. People with high credibility are on both sides of the fence on this issue, so who is right?

            It’s choose your own opinion time and I go with a behemoth of 1.3 billion people not being able to stifle demand overnight.

          • I’m with you on that one, Peter. And as far as I am concerned, you are entitled to express your opinion here whenever you like – as is the Lorax!

          • I go with a behemoth of 1.3 billion people not being able to stifle demand overnight

            Why on Earth you think a large population makes any difference whatsoever to economic growth rates, is completely beyond me!

            There are a billion people in Africa. No-one ever talks about them, and if anything they’ve got much more opportunity to develop and grow than the Chinese.

            China has a growth model that has worked very well for the past 20 years, but its clearly reaching its limits now. That’s what we need to focus on, not population numbers which are completely meaningless.

            Evidence. Logic. Not assertions please!

    • “Talks of a hard landing have been largely overstated although any sane forecaster would expect some deviation from a straight line slowing.”

      Thats a bold statement…… only time will tell.

  2. China’s prime directive is for social cohesion, and they will do all in their power to keep the citizens as happy as they can. With that in mind I’m sure China will keep the growth in imports flowing all be it at flat or lower rates. I’m more in the camp of moderate growth so Wayne can rest easy for a bit. I wouldn’t pay any attention to the BREE forecast.

  3. Just a quick question, what is total value of mining worth to Australia? Eg the equities market is worth 1.2 trillion in total, what is mining worth??

      • Thanks for that!

        I really should have really asked someone to point me in the right direction for the information but this is more than enough, thanks!!

        • Or I could just tell you!

          Mining makes up 10.332% of GDP with construction at 8.368% (finance is 14.028% and manufacturing is 9.075%)

          • Well im quoting Wikipedia here they claim that:

            “The mining sector represents 10% of GDP; the “mining-related economy” represents 9% of GDP – the total mining sector represents 19% of GDP.”

            So with GDP being roughly 1.5 trillion then the entire mining industry is only worth 285 billion to Australia.

            This seems really out of whack to me, its not worth that much when residential housing in total is worth 4.5 trillion, or am I doing something wrong 🙁

          • Indeed, georgie, you are doing something wrong. You are comparing the annual output of the mining industry with the capital value of residential housing. Now, you are still right in your conclusion that something is out of whack – residential housing is indeed overvalued – but the mining industry is worth a whole lot more than $285m. If one assumed an average P/E of 8 (not unreasonable) that would value the mining industry at $2.3b.

          • @Alex

            Thanks for that, I knew it wasn’t that simple.

            Are you able to point me to any research of figures that can give a semi-accurate market capitalisation of what the mining industry is worth?

          • I’m not aware of any. It would have to take into account the fact that the big players are multinational companies with interests in a lot of places, as well as having dual stock exchange listings in the cases of BHP and RIO. Would also need to take account of the mining supply and contracting industries. Not a straightforward task.

  4. Leith: While reading the first few paragraphs I was thinking “what are their assumptions for gas prices”. I’m glad you highlighted that issue. The global gas glut is not something that’s entered the mainstream consciousness yet.

    BTW, I didn’t know that ABARE had become BREE. When did that happen? ABARE haven’t been known for their conservative forecasts for commodity prices in recent years. Their forecasts from around 2007 make interesting reading.

  5. “The growth in Australia’s LNG industry over the next five years is underpinned by over $175 billion worth of investment to expand capacity in Western Australia, Queensland and the Northern Territory”

    Why we always presuppose that all our investment projects will be profitable and their capacity will be 100% fruitful and efficient? We are under the same unpredictable global circumstances as the Chinese are. When they build overcapacity in many industries, it is always their government to blame, because it owes the state companies and they cannot be efficient. But here just because the investments in more capacity are made by private companies we suppose they will be always fruitful and efficient. I don’t understand this logic. Especially when our economy, e.g. mining sector, is so much defendant on Chinese economy and policies.

  6. Diogenes the CynicMEMBER

    I will take the under on those export figures. The China growth figures are rubbish.

    Also we will struggle to make those gold production forecasts, grades keep declining, unless there are some massive ore bodies not yet discovered production here will be flat or falling.

  7. I am gobsmacked.

    The word “depletion” does not appear in this 182 page report.

    It’s omission tells you either that the BREE is totally incompetent in not even considering the issue or that the answer is so bad that they don’t want to talk about it.

    Prior to the current iron ore expansion the Pilbara was supposed to have about 50 years of supply left. What does this expansion do to that estimated time of depletion?

    This resources export boom is great for present residents of Australia, but disastrous for some future generation that doesn’t get a benefit it otherwise would have obtained because of earlier increased scarcity/depletion.

    When the resources are depleted, manufacturing and services also get hit.

    GDP measurement pays no regard to resource depletion. How do the national accounts show the impact of resource depletion, and how do they show the impact on future generations? Does any intergenerational reporting specifically measure the impact of these increases in exports on future generations?

    • When the resources are depleted, we will become like any other nation that has few natural resources. That’s all. We’ll adjust.

        • I agree. As a recent admirer of some of Peter Thiel’s ideas re horizontal and vertical models, I see Australia firmly (increasingly) on the horizontal mode, which leads me to a less than optimistic conclusion.

    • Explorer, what you are missing is that “the amount of supply left” is based on the resources that have so far been identified. Most of Australia has not been explored for mineral resources. That is why we keep finding large new resources.

      Eventually, Australia might run out of iron ore. Chances are that we will have moved on to substitutes for steel long before that happens. Many areas of materials technology are still in their infancy.

      • Alex, what you are missing is that the increase in export volumes over the next few years are going to reduce the remaining life of identified mineral resources by 33% to 66% (guestimate)

        For example thermal coal goes from 167 in 2011 to 271 in 2017, (pdf p 61) an increase of 62.3% meaning if the life of the resource was 100 years it will now be 62 years and shorter if there is any further increase in usage, Gas production goes from 55.9 in 2011 to 137.1 in 2016 an increase of 145% which means if the life of the resource was 100 years it goes to 40 years and shorter if there is any further increase in usage).

        Australian Oil exports are expected to decrease from
        about 24 GL to about 14 gl between 2001 and 2017 (p37 of pdf) and this is in spite of current prices being about 250% of the average price since 1970 (say 100 now compared to say 40 average).

        Have a look at Table 3. Look at the average annual growth in export volumes. Look at the change in volumes between 2010/11 and 2016/17. Give us your numbers on current resource life and the change from the increased extraction rates needed to sustain the increase in exports.

        Your assertion that it will all be OK because technology will change is just a bit thin in the face of an increasing population and increasing consumption rates with nearly all currently used resources becoming more expensive to find and extract in nominal dollars, real dollars and energy inputs.

        What happens to our current account and GDP as these resources are depleted? What transitions to we need to implement to prepare for Australian resource depletion?

        What are the existing resources and rates of discovery and costs of extraction of recently discovered resources?

        Why isn’t BREE disclosing their forecasts/estimates for this information?

        • Whoa. It’s only a government department. How can it estimate/quantify future deposits. End up being something like the oil scares of decades past.

          • Every exploration by private enterprise in Australia has had to lodge its data with one of more government for years. They have gigabytes (is that the right label for 1000’s of terrabytes?) of geological information from all over Australia.

            Most of the large resources are owned by public companies like Rio, BHP Billiton etc and they have to disclose their resources and reserves by law as it is market sensitive information.

            All companies that want to explore are required to get exploration licences from the crown (normally state governments) (about 98% of minerals are reserved to the crown including on lands where native title has been upheld or agreed).

            All mining leases are granted by the crown so they can claim royalties.

            What makes you think that governments don’t have the data?

          • Coordination of statistical resources; undiscovered/unquantified deposits; human error! Geo teams are out there every day, everything is a best estimate. My reference previous was to the doomsday calls of end of oil by 19xx. Didn’t happen.

        • Explorer, I am happy to admit that I don’t know the answers to all your questions. I don’t think anybody else knows, or even could know the answers either.

          The world is divided into optimists and pessimists. I am in the former camp. You are in the latter. I think you need to get used to the idea that we would probably disagree about many things, just on the basis of our fundamental outlook on life.

          Just one thing I would point out, though. It is the optimists who get things done, while the pessimists sit around bemoaning fate and looking at all the possible obstacles.

          • Yes Alex, my son has a plaque which says “no statues for critics”, but sometimes critics are right.

            Lots of things that got done, (possibly by optimists as you assert) have been proven to be cock ups, if not from one point of view then from another. Fukishima and Chernobyl are two that come to mind. But I am happy to admit too that some things that got done by optimists have been resounding successes. The outcome of what was done didn’t depend on the disposition of the product champion/researcher/investor.

            Optimists bought tech stocks in 2000 and pessimists didn’t.

            I’m happy to reach an ability to disagree, I’d just like it to be on the basis of analysis of data.

            I also don’t think that failing to make an informed best guess should be an acceptable approach when there is a lot of data available and there are very well argued estimates of increasing resource scarcity and price both in dollars and likely energy required for extraction.

            But you are right, I do look for the faults and omissions in analysis and I am loss averse.

          • Cool, and I quite agree about the optimists being the ones who often stuff up.

            And I also would prefer we had more information on this topic (and many others), but I don’t think it can happen.

          • Esteemed conservative philosopher Roger Scruton wrote a book The Uses of Pessimism (and Danger of False Hope). I like Scruton. But you can’t help your natural propensity!

            🙂

          • And I’m pretty sure I can guess the happier (or less anxious – Weekend Oz snippet referring to correlation between mental disorders and obsession with the environment).

  8. adelaide_economist

    Yes, I’m tempted to believe there is plenty of long-term upside in LNG. There are certainly many new sources coming online (indeed, right now there is talk of an Alaska pipeline to supply Asia which originally was going to supply the US but is no longer competitive with all the shale gas).

    But there are some big ‘game changers’ going on completely unrelated to the China question, including the potential likelihood for Japan to massively boost LNG use long-term as their ‘nuclear pause’ becomes a ‘nuclear freeze’. A stable country like Australia might well be very attractive from an energy security perspective in a way that many other potential suppliers wouldn’t be, regardless of a small price premium. I would suggest much of the recent diplomatic ‘closeness’ of Japan to Australia (initiated by them) alludes to this type of thinking.