No sign of any immediate or even medium term good news for Australia’s embattled resource sector in the latest quarterly forecast by the Bureau of Resource Economics and Energy (BREE), the federal government’s resource forecaster.
For each of our major resource exports – iron ore, coking coal and steaming coal – the near term outlook is poor, with only coking coal likely to see some improvement – but not until 2016 at the earliest, the Bureau said in its September update released yesterday.
So for investors in companies from New Hope, to BHP, Rio Tinto, Fortescue, Atlas, Arrium, Whitehaven and more, the outlook is for two years or more of fairly average performance, and worse, losses and perhaps rising financial pressures.
You only have to look at the way the iron ore sector has been hammered this year in the 41% fall in iron ore prices to realise that the outlook is grim, especially as the BREE sees no real gain in iron ore prices for the next five years!
And if the price of iron ore should dip under the $US70 level in the current slide, then investor sentiment will be shaken, further underlining the grim outlook for the resources sector.
From the BREE report only the hydrocarbons sector – especially LNG – has a solid outlook.
Iron ore will average about $US94 a tonne this year, from $US105 a tonne forecast in June, BREE said in its report. It was trading just under $US80n a tonne yesterday in Asia.
The Bureau sees the price remaining at $US94 a tonne next year, down from $US97 estimated in June.
“Iron ore prices have fallen 37 per cent since the start of 2014 due to increased supply from Australia and moderating demand growth in China," the report noted.
“Since the move to spot pricing iron ore prices have displayed regular cyclical swings.
"Iron ore volumes are forecast to increase by 13 per cent in 2014-15, underpinned by a full year of production by recently started mines.
"However, earnings from iron ore are forecast to decline by 4 per cent because of forecast lower prices,” the Bureau said.
The weakness of the trio of major export commodities will be the major drivers in lowering the value of minerals and energy exports to $A192.4 billion in 2014-15, down from the $201.4 billion forecast in the Bureau’s June forecasts.
The bureau’s forecast for iron ore prices this year was reduced to $US110 in the March report from $US119 a tonne in December, before the cut in June. The price forecasts refer to spot ore with 62% Fe content free-on-board Australia for shipment to northern China.
While the Bureau expects prices to rebound from current lows, over the medium term the peak of each rebound and trough is likely to be lower as more supply enters the market.
For coking coal (used in steelmaking), price declines have slowed recently which is largely due to lower demand in China with the downturn in its property market, the report noted.
"The market balance is expected to tighten from 2016," BREE forecast, "as China’s real estate sector recovers and the closure of unprofitable mines reduces supply availability,” the report said.
For steaming (thermal) coal, however, which is used mostly in energy generation, an upturn in its prospects remains more elusive.
Compared to the outlook for iron ore and coal, the prospects for hydrocarbon based energy is looking a lot better.
"The prospects for the resources and energy industry remain positive. Continued economic growth in highly populated emerging economies will sustain increased demand for both resources and energy commodities into the future,” according to Wayne Calder, Deputy Executive Director of BREE.
There’s also the move last week by China to ban high ash, high sulphur coal in an effort to control pollution in the country’s huge population areas on the coast and around Bejing.
“Closer to home Australia is moving decisively from the investment phase of the mining boom to the production phase” Mr Calder said.
“We will continue to see expansions in capacity from the Australian resources and energy sectors with increasing supply of iron ore and coal as well as the commencement of major new LNG projects across Australia."
First LNG shipments from the East coast are expected to start by the end of this year, rapidly ramping up over the period to 2019 to make Australia the world’s largest LNG producer, according to the Bureau.
Australia’s total earnings from mineral and energy commodities increased 12% in 2013-14 to $195 billion, supported by robust growth in both minerals and energy export volumes.
Mineral commodity earnings were $124 billion, up 6% from 2012-13, driven largely by increased iron ore export volumes. Earnings from energy commodities were $71 billion, up 7%, underpinned by higher earnings from LNG, crude oil and coal.
BREE said Australia’s earnings from resources and energy commodities to increase at an average rate of 7% a year from 2013–14 to total $274 billion in 2018–19.
"Higher export earnings will be driven by the substantial growth in volumes of a number of commodities despite near term softness in prices.
"In the short term, higher volumes of iron ore and coal will be the principal drivers of export growth.
"As new LNG production capacity comes online over the outlook period, LNG exports will increase and make it one of Australia’s principal exports,” the Bureau said.
And finally, investors should heed the realistic assessment of future iron ore price growth contained in the latest report.
It points out that iron ore could be selling at $US86 a tonne in today’s dollars – which if inflation averaged 2.5% a year, would be less than the current weak price of just under $US80 a tonne.
Australian mining companies are forecast to be producing 900 million tonnes of ore in 2019 – against 400 million tonnes in 2010 and 768 million tonnes in 20914-15.
Deloitte reckons every $US1 a tonne drop in the world iron ore price cuts national income by $US700 million. (The total value of iron ore exports was $74 million in 2013-14.)
It is projected to rise to a value of around $US88 billion by 2019, with production above 900 million tonnes.
