Government expects commodity exports to peak later but higher
In its ‘Resources and Energy Quarterly’ report, the Office of the Chief Economist has predicted a significant change to Australian commodity forecasts over previous years. In recent years, it has predicted commodity export earnings would peak in 2018–19. As recently as March 2019, it was predicted there would be record earnings of $278 billion in 2018–19, before earnings fell back in the following years. The forecast for 2018–19 looks to be largely on target but, although large, it is now believed that the peak will now be in 2019–20. Resource and energy commodity earnings in 2019–20 have been revised up by $12.9 billion to $285 billion.
The largest swing factor is iron ore prices. The fallout from the Brumadinho tailings dam collapse (which Vale SA is working to remedy) has led to a sharp drop in Brazilian iron ore exports, and this shortfall now looks set to last at least two years. The seaborne iron ore market is thus likely to stay tight, and prices elevated, out to at least 2021. Extra Australian output will partly fill the gap, as mining expands and disruptive weather in Western Australia recedes. The weaker Australian dollar outlook has also pushed up the 2019–20 forecast.
Australia’s fourth-largest export commodity, thermal coal, is facing a tougher climate, with prices deteriorating. As a large producer and importer of thermal coal, China’s import policies, including extended customs clearance times, have added uncertainty into the market. Seasonal factors appear to have had a larger than normal impact this year: the Northern Hemisphere — where most thermal coal is burnt — has emerged from a warmer than usual winter, which reduced heating-related energy use. Peak summer demand, when air conditioner usage rises, is a month away.
In the past, commodities helped to protect Australia from larger fallout during the Global Financial Crisis; however, the opposite could happen in a downturn sparked by trade disputes, particularly the dispute between the US and China. Trade disruptions will hit global manufacturers especially hard, and the impacts will inevitably flow on to the commodity producers who provide the raw materials to manufacturers. This could result in an outsized impact on nations with a high commodity exposure.
Many firms were able to absorb the initial 10% tariff into their margins; however, the escalated 25% tariff will force major changes to global supply chains. The fallout of these changes may actually favour some steel producers in unanticipated ways. Should the Chinese Government proceed with further stimulus packages involving increased infrastructure spending, steel use could actually rise in net terms.
Geopolitics is magnifying uncertainties, especially in oil markets — and any substantial rise in oil prices, and tight carbon budgets, may accelerate the age of electrification, as nations seek to reduce emissions and curb oil dependency by embracing electric cars.
The full report can be downloaded here.
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