Australia’s commodity volume bonanza

The Bureau of Resource and Energy Economics (BREE) is out with its latest quarterly assessment of commodity markets. I like BREE. They tend to forecast more conservatively than one might expect. The major story emanating from the latest update is the fruits of the long predicted surge in volumes in Australia’s major commodity exports, which will offset price declines:

Australia’s resources and energy commodity export earnings are forecast to reach a record $209 billion in 2012–13, according to the Resources and Energy Quarterly—June quarter 2012, released today by the Bureau of Resources and Energy Economics (BREE).

“The continued increase in Australia’s minerals and energy export earnings will be underpinned by strong growth in export volumes, particularly for iron ore and LNG following the completion of a number of projects.” said Professor Quentin Grafton, BREE’s Executive Director and Chief Economist.

The growth in earnings in 2012–13 is forecast to be underpinned by increases in export values for: iron ore, gold, thermal coal, liquefied natural gas, copper and alumina.

A lower assumed value of the Australian dollar against the US dollar in 2012–13 will also support increases in the value of Australia’s resources and energy exports.

With the exception of aluminium, export volumes for all major minerals and energy commodities are forecast to increase. The largest increases, in percentage terms, are forecast to be LNG (21 per cent), alumina (15 per cent), metallurgical and thermal coal (both 13 per cent), iron ore (10 per cent) and copper (10 per cent).

…The forecast increase in LNG exports in 2012–13 reflects the start up of the Pluto LNG project, which will increase Australia’s LNG capacity from around 20 million tonnes to over 24 million tonnes. Australia’s LNG capacity could exceed 80 million tonnes by the end of this decade.

Economic growth across a number of major economies, including China, is assumed to slow in 2012, relative to 2011, and then increase in 2013.

The rise in volumes is a good story, even if it results in the fall in prices. But I am still not satisfied that BREE is being conservative enough at this point in the business cycle. Witness its growth assumptions:

None of these forecasts are outlandish but they are basically an extrapolation of where the global economy is right now. I expect things to get worse before they get better. For instance, Western Europe is still in line for a full blown recession in my view. Where is it’s growth going to come from with paralysis in fiscal policy and a liquidity trap emerging across much of the Continent? You might look to exports but to where? A European recession may happen by a thousand cuts but it is still going to happen in the next year or so. The US is also likely to see greater weakness, though not recession (unless there’s a shock). Emerging markets are not going to grow at 6% either, with weakness in Eastern Europe, Russia and India worse than this forecast. China looks about right.

Given this, BREE’s assessment of market growth in some commodity segments look rosy. The thermal coal market is expected to expand 4% in 2013, the steel market by 4% and the sea born iron ore market by 8%. Flat is more likely, even without a shock.

We’ll still see the volume expansion here, of course. And no doubt capture greater market share. But the trend in prices is more likely to follow the current relentless downtrend of thermal coal than it is the nascent iron ore recovery.

Still, there’s no doubt that the volumes are coming and will mitigate price falls.


David Llewellyn-Smith
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  1. “Western Europe is still in line for a full blown recession in my view.” Agree. “The US is also likely to see greater weakness, though not recession (unless there’s a shock).” I would call Europe going into a major recession a shock that will most likely place the USA into another recession and see President Obama lose his position. He should get a Clinton back on the job – ‘it’s the economy stupid!’

    • I doubt Obama would lose even if the US was to go into a severe recession in the 2nd half of the year, simply because Romney is such a weak opponent.

        • If Romney implements austerity, for a change we may see a lot of undocumented US workers in Mexico.

          Jeffrey Sommers/Michael Hudson: Latvia, the Austerians’ Potemkin Village

          Demographers estimate that 200,000 have departed the past decade – roughly 10 per cent of the population – at an accelerating rate that reflects the austerity being inflicted. ..Moreover, birth rates declined from already low numbers. If a similar percent left the US, some 30 million would exit. Where would they go? Mexico?

        • On US austerity – the only version that would work extremely well (and actually might cause some domestic inflation) is a dramatic slowdown or reversal in military spending overseas.

          Not military procurement (which has next to no chance of succeeding, the pork barrels are too tightly entwined into the local politicians stomachs) but base maintenance and bringing home a few hundred thousand soldiers (and hence paychecks).

          Could cut a sizeable amount of the budget that way without any delitirious effect on domestic aggregrate demand.

          Now, this is a bet I will take – regardless of donkey or elephant in government next year. It. Wont. Happen.

          The Empire continues….sadly

          • The Prince – yes you are correct, the Empire will continue because they always will and always have – that is the great Imperial superpowers – they will do what is best their own interests. The USA is a reluctant superpower though, preferring isolation, but the power is to great to reign in, for both sides of politics. Obama made the right noises to the middle east & Europe about how US ‘exceptionalism’ is a dud and that the US had hurt other nations – but he still has not closed Guantanamo or pulled the troops out of Afghanistan, he is also hedging his bets against the Chinese in the Pacific and using Australia as a base. On the flip side, if the USA does not introduce genuine ‘austerity’ it will go bankrupt – just like any other household with to high mortgages and credit debts. Romney & Obama will continue the power ‘coddling’ with Wall Street also and the hegemony of world trade, military power and soft power will continue for the rest of this century at least.

      • No chance? Dont misunderestimate (sic) the stupidity of Americans (I can say that, I’m half Yank)

        As an observer from 3000 miles(?) away, I think it will be closer than you think Lorax.

        Unless there’s a sudden dip in economic fortune for the US from here to November…then all bets are off.

        • I know they elected Bush (twice!) but there were reasons for that. Bush mobilised the cultural conservatives, he was one of their own. Romney isn’t, he’s a Mormon.

          Bush (for all his faults) was perceived to have the common touch, he was (supposedly) just a regular guy. Romney isn’t.

          In 2000 Bush only just won despite the tech wreck, Monica Lewinsky, a nerdy opponent and eight years of Democratic rule.

          In 2004 the US economy was roaring along, Bush has a weak opponent and he was riding a wave of nationalism after 9/11.

          But ultimately, Romney’s biggest problem is he’s just not likeable.

  2. I like BREE. They tend to forecast more conservatively than one might expect.

    I disagree. I think BREE (and its predecessor ABARE) have been overly bullish on resources (volumes and prices) for many years. Their 2007 forecasts make especially amusing reading.

    BREE also have a key role in the Canberra group-think by providing “forecasts” (really just extrapolations of current conditions) that back up the entrenched views of Treasury and RBA economists.

    • It was true in 2007 and I’ve critiqued them since for the same thing. Maybe I’m so cynical these days that vague representation of reality in government is praiseworthy!

    • I agree Lorax. They have been very slow in realising the world is slowing down. In the March REQ, they had China’s growth forecast at 8.8% to 2017! That’s just silly. They tend to be a bit like the IMF – slow on the uptake.

      Also, their recent China Review was just a rehash of everything people in the industry already know – the China growth story. Similar to my comment yesterday that the government won’t say much that highlights downside risk, BREE have said very little to nothing about the mechanics of Chinese growth.

  3. Forecasting is a tricky game at the best of times. This looks OK to me, maybe a tad on the upside with global growth but that’s fine. Time will tell.