Forecasts for energy and minerals: ABARE

By Paula Wallace

The key message from the Australian Bureau of Agricultural and Resource Economics’ (ABARE) latest report on energy and minerals, is that the reduction in world demand and supply due to weak economic performance is only for the short-term.
Its Australian Commodities report for the March quarter, states that medium-term demand growth is projected to remain strong, underpinned by strong rates of economic growth in developing Asia.
Furthermore, world prices for energy and minerals commodities are expected to recover after 2010 in line with a broader economic recovery.
Accordingly, Australian export earnings from energy and minerals are forecast to decline markedly in 2009-10, but are projected to improve over the medium term.
Developments in China will play a key role in shaping world economic growth to 2014, says the report. In the short term, China is in a reasonable position to withstand the adverse effect of the global financial crisis.
Economic activity in China slowed considerably over the past year. Partial indicators released recently suggest growth in exports, industrial production and foreign direct investment has declined in late 2008.
Over the medium to longer term, rapidly rising per person incomes in China are expected to lead to a significant increase in consumer demand. According to ABARE the World Bank has estimated that China’s so-called ‘global middle class’ is expected to rise from 56 million people in 2000, to around 361 million people (or around 25 per cent of the total population) by 2030.
In terms of the price outlook, ABARE reports that over the medium term (to 2014), world prices for mineral resources are projected to recover in line with the assumed world economic recovery, and an improvement in commodity demand.
As a result of weak demand, there have been reports of a marked build up of stocks for many energy and minerals commodities. Consumers have been able to draw on stocks, which is contributing to falling production for a number of commodities, particularly iron ore and thermal coal. In the short term, growth in production for many commodities will be relatively limited because of high levels of consumer stocks.
The report suggests that the current downturn in commodity markets must be viewed in an historical business cycle context. A marked increase in new production capacity in response to the sharp rise in prices between 2004 and early 2008 is now, in combination with weaker demand, contributing to significant downward pressure on prices.
As part of the business cycle, it will be reasonable to expect that a strengthening in demand over the medium term, underpinned by the assumed economic recovery, will once again place upward pressure on energy and minerals prices, the report states.
Production of metals and other minerals is forecast by ABARE to increase modestly by 0.8 per cent in 2008-09, as increased production of iron ore and thermal coal more than offsets production cuts for zinc, nickel and lead. In 2009-10, production is forecast to increase by 6.7 per cent, owing to a strong increase in iron ore production.
Production of energy commodities is forecast to increase by 4.3 per cent in 2008-09, driven largely by increased thermal coal, oil and gas production. Modest growth in production of 0.1 per cent is forecast for 2009-10, which reflects weak growth in metallurgical and thermal coal production and lower petroleum production.
Over the medium term, production of energy and minerals commodities is projected to increase by 20 per cent in 2013-14 compared with 2008-09 volumes, as rising demand and the subsequent increase in prices encourages investment in new capacity.
Export earnings from energy and minerals commodities are forecast to increase by 40 per cent in 2008-09, to $162 billion, as higher export earnings from bulk commodities and gold are partially offset by falling export values for base metals.
Expectations of lower contract prices for bulk commodities for the Japanese fiscal year 2009 (JFY, April-March), to take effect in April 2009, combined with lower forecast prices for base metals, are forecast to result in total minerals resource export earnings falling 21.2 per cent to $128 billion in 2009-10. This, together with lower export volumes, is forecast to more than offset the positive effect on earnings of an assumed depreciation of the Australian dollar.
Export earnings from metals and other minerals are forecast to rise by 20 per cent in 2008-09 to $85 billion, largely because of strong growth in earnings from iron ore. This growth will be offset by falling base metals prices and weaker demand. Export earnings in 2009-10 are forecast to decline by 9 per cent to $77 billion, underpinned by expectations of lower iron ore and base metal prices.
Over the medium term, rising export volumes, accompanied by higher projected prices for most energy and minerals commodities, will offset the effect on earnings of an assumed stronger Australian exchange rate against the US dollar. Australian earnings from energy and minerals commodities are projected to grow at an average annual rate of 2.8 per cent to $140 billion (in 2008-09 dollars) in 2013-14.
However, ABARE also notes that there is considerable risk to price projections over the next few years, which mainly stems from the uncertainty associated with the timing and strength of the assumed economic recovery.