Resources and Energy Quarterly September2016

Resources and Energy Quarterly September2016

Further Information

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

www.industry.gov.au/oce

Chapter Authors

Macroeconomic outlook: Kristy Krautler and Ana Porta Cubas

Resources and energy overview: Marco Hatt and Kieran Bernie

Steel, iron ore and nickel: Monica Philalay

Metallurgical and thermal coal: Gayathiri Bragatheswaran

Oil and gas: Nikolai Drahos

Uranium: Mark Gibbons

Gold and copper: Joseph Moloney

Aluminium, alumina, bauxite and zinc: Thuong Nguyen

Acknowledgements

The authors would like to acknowledge the contributions of:

Mark Cully

Tim Bradley

Ross Lambie

Nicole Thomas

David Whitelaw

Laura Ling

Katya Golobokova

Cover image source: Shutterstock

© Commonwealth of Australia 2016

ISSN 1839-5007 [ONLINE]

Vol. 5, no. 5

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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

Prices for most construction and steel making raw materials continued to grow in the last three months — despite expectations of decline — because of unexpectedly resilient demand from China’s construction sector and unforeseen supply disruptions.

The speculative activity in China’s commodity futures markets that led to high spot price volatility in the first half of 2016 has tapered off. This was supported by measures to reduce speculative trading, including increased commission fees, margin requirements and trading restrictions. Commodity prices should therefore better reflect market fundamentals going forward.

China’s economy — and its demand for construction raw materials — is slowing as it transitions away from investment-led growth to consumption-led growth. While any slowdown in the short term remains sensitive to government policy and stimulus measures, the likelihood of significant increases in demand from China for resource commodities is limited.

Australia’s suppliers are well-placed to satisfy demand for resources and energy over the next fifteen months, despite difficult operating conditions. In particular, production of most 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 12 per cent to $176 billion in 2016–17.

Mark Cully
Chief Economist
Department of Industry, Innovation and Science

1.  Macroeconomic Outlook

1.1  World economy

World economic conditions were generally softer in the June quarter of 2016. Europe experienced better-than-expected growth, while growth in the United States was weak. Productivity growth in most advanced economies remains slow. Global industrial activity and trade have also been lacklustre. In July, the volume of world trade fell 0.9 per cent year-on-year.

Poor trade outlooks and the continued uncertainty following the Brexit have led the International Monetary Fund (IMF) to make downward revisions to economic growth forecasts. The global economic growth outlook was marked down by 0.1 percentage point to 3.1 per cent in 2016 and 3.4 per cent in 2017. This is attributed to a weakened outlook for advanced economies, which are forecast to grow by 1.8 per cent in 2016 and 2017. The outlook remains unchanged for emerging markets and developing countries, at 4.1 per cent in 2016 and 4.6 per cent in 2017.

A number of ongoing risks continue to keep global economic prospects low. These include continued uncertainty for Europe and the United Kingdom following the recent Brexit referendum, China’s continued reliance on borrowing to increase growth, and weak trade patterns coupled with growing protectionist sentiment around the world.

1.2  Outlook for key economies

China’s outlook remains steady despite weak private investment

Chinese growth remained unchanged in the June quarter, growing 6.7 per cent, year-on-year. Despite steady growth figures, investment and new construction has slowed as the stimulus from earlier in the year fades. The outlook for residential construction is discussed in Box 1. Private fixed asset investment grew only 2.1 per cent from January to July, due to weak non-state firm investment which fell by 1.0 per cent year-on-year.

In an effort to stimulate growth through private investment, the Chinese Government has made cost cutting a key policy goal. By financing local government debt, the central government intends to help boost revenues so local governments can cut business taxes. In addition to the central bank reducing financing costs, the labour ministry has lowered social pension payment obligations for business. The shift from business taxes to value-added taxes reduces the burden for business by 500 billion yuan (US$75 billion) a year. This should significantly cut business costs and encourage private non-state firm investment, allowing the economy to pursue growth in areas outside the housing market.

Figure 1.1: World trade volumes vs world trade values

Recent data suggests that while state-firm investment is weak, investment growth remains strong for state-owned enterprises. Competition with state firms and restricted access to some markets, particularly in the services sector, is preventing private investment from taking full advantage of these reforms.

China’s imports from the rest of the world performed unexpectedly well in August, rising 1.5 per cent year-on-year, marking the first increase in 22 months. The rise was largely attributed to a stockpiling of resources as Chinese producers are expecting commodity prices may start to pick up in some areas. This follows a better-than-expected result for China’s manufacturing activity in August with the official index of manufacturing activity reaching 50.4 indicating the sector is expanding. These positive indicators for both imports and manufacturing may indicate domestic demand is improving.

Box 1.1: The outlook for the Chinese housing sector

The Chinese housing sector has experienced marked growth since its liberalisation in the late 1990s, when the government decision to abolish employer-allocated housing spurred a residential construction boom. Much of this growth in the sector has continued to be policy driven, and there are questions about the future sustainability of growth in the absence of policy interventions. Any slowdown in housing construction poses risks for exports of commodities used in construction, including iron ore, metallurgical coal and copper. Australia is highly dependent on the Chinese demand for construction raw materials—over 80 per cent of Australia’s iron ore exports go to China.
Chinese governments have traditionally been highly involved in modulating demand in the housing sector, including managing differences in demand between cities. One of the Central Government’s five goals for 2016 was to reduce housing inventories and stabilise the housing market. In early 2016, it undertook a number of steps, most notably lowering interest rates and business taxes in cities other than the more desirable cities of Beijing, Shanghai, Guangzhou and Shenzhen. The Central Bank also eased lending standards, lowering the necessary mortgage down-payment for first homes from 25 to 20 per cent and from 40 to 30 per cent for second home buyers. These stimulus measures resulted in a spike in construction completions growth in early 2016, following a decline post 2012.
The future growth of the Chinese housing sector is uncertain. The Chinese Central Government is focussed on moving from investment to consumption-led growth, and earlier this year stated no excessive stimulus would be required to achieve their growth targets in the immediate future. Additionally, the housing market has now matured and there is oversupply in the less desirable smaller and inland cities. It is therefore likely that the Chinese government will provide only a light touch in modulating housing construction in the medium term. As a result, the current uptick in China’s construction activity and commodity demand is unlikely to be sustained, which will place downward pressure on commodity export volumes over the outlook period. The outlook is sensitive to Central Government policy, and could change if the Government decides to once again stimulate housing demand through monetary and fiscal measures.
Figure 1.2: Floor space of completed residential buildings, annual growth

However, weakness in exports (which dropped 2.8 per cent year-on-year in August) and overcapacity in many sectors will continue to be a challenge for China’s economic transition.

China’s economic growth outlook remains steady from previous forecasts at 6.6 per cent for 2016 and 6.2 per cent in 2017. The growth forecast for 2016 falls within the government’s target of between 6.5 and 7.5 per cent.

1.3  Indian manufacturing continues to grow strongly

India’s GDP growth slowed to 7.1 per cent year-on-year in the June quarter. Strong growth in government spending and net exports were offset by slowdowns in both private consumption and investment growth. Consumption growth dropped to 6.7 per cent year-on-year, compared to the previous quarter result of 8.3 per cent. Private investment fell by 3.1 per cent year-on-year.

Sectors that contributed to lower-than-expected growth include mining and construction. Mining sector output declined by 0.4 per cent due to falls in the production of crude oil and natural gas. This is a significant drop for the mining sector, compared to previous growth of 8.3 per cent in the same quarter last year. Growth in construction slowed to 1.5 per cent, compared to growth of 5.6 per cent in same quarter last year.

Manufacturing continued to grow strongly. The sector grew 9.1 per cent in the June quarter year-on-year. This result was also reflected in the official index of factory activity which reached 52.6 in August, the highest level since July 2015. The index measures manufacturing performance with a result above 50 indicating that the sector is expanding.

Despite slowing growth in the June quarter, the forecast for India’s economy remains robust. Economic growth will be supported by a number of structural reforms, including the passing of a bill introducing a national Goods and Services Tax (GST) which is expected to commence in April 2017. It is expected this reform will add between 0.8 per cent and 1.7 per cent to economic growth following implementation in April 2017. The Indian economy is expected to grow by 7.4 per cent in both 2016 and 2017.

Figure 1.3: China’s imports and manufacturing activity

Figure 1.4: India’s construction and manufacturing gross value added

1.4  Japan’s exports remain weak amidst an appreciating yen

Japan’s economy grew 0.6 per cent year-on-year in the June quarter. Net exports and business investment remained weak as a higher yen hurt exporters, and businesses remained cautious. Japan remained in deflation, with consumer prices falling 0.5 per cent year-on-year in July. Meanwhile, industrial production fell 3.8 per cent year-on-year.

At the Bank of Japan’s September meeting, the governor chose not to further lower the -0.1 per cent interest rate on bank deposits. The governor noted that ultra-low long-term interest rates were hurting the investment returns of insurance and pension companies and damaging business sentiment.

The Japanese Government has announced stimulus measures of 13.5 trillion yen (US$13 billion) in the form of cash payouts to low-income earners and infrastructure spending. In doing so, the government hopes to encourage greater spending to reverse the trend of deflation and encourage economic growth.

These measures have supported an appreciation of the yen, which make Japan’s exports more expensive for other countries. Exports fell 14 per cent year-on-year in July, marking the tenth month in a row for falling exports. As a result, the IMF’s growth forecast for Japan in 2016 has been reduced by about 0.2 percentage points to 0.3 per cent.

A delay in the increase of the consumption tax from April 2017 to October 2019 has improved growth prospects for Japan in 2017. However, any benefit to growth will be moderated by a higher yen that continues to hurt exports.

1.5  South Korea faces increased competition from Chinese manufacturing

South Korea’s economy picked up in the June quarter, growing 3.1 per cent year-on-year. Both private consumption and investment increased, though exports growth remained soft due to weak global demand.

Slowing demand from China has also hurt South Korean exporters. As Chinese manufacturers move up the value chain and produce higher quality goods, this could result in increased competition for South Korean exports in the future.

Figure 1.5: Growth in Japan’s exports

Figure 1.6: South Korea’s trade price indices

In an effort to stimulate growth, the South Korean government announced an 11 trillion won (US$10 billion) supplementary budget in August. The stimulus package is intended to help reduce the negative impact of corporate restructuring on the job market and complement the rate cut from the Bank of Korea in June.

South Korea’s economy is forecast to grow by 2.7 per cent in 2016, and 2.9 per cent in 2017. An unexpectedly sharp slowdown in China remains the biggest risk for South Korea, as China accounts for one quarter of South Korean exports. A planned restructuring of major industries may also lead to higher unemployment in the short run, and growing household debt could constrain private consumption.

1.6  United States shows gradual improvement

The United States (US) economy grew by 1.2 per cent year-on-year in the June quarter—the slowest in three years—although other economic indicators suggest stronger economic conditions. In particular, the labour market continues to show improvement.

US interest rates remain low with the Federal Reserve choosing not to increase interest rates at their September meeting. However, we expect a rate increase to be announced later in 2016.