Australia has successfully ridden through the COVID-19 pandemic thanks to raging commodity prices and a “booming” resources sector – and continues to achieve record export earnings. However, forecasters are suggesting there are concerns on the horizon.
While many of its competitors were halted in their tracks – particularly for commodities like iron ore – Australia was able to ramp up its production and take advantage of rising prices. According to the Australian government, the fallout from Russia’s invasion of Ukraine is still driving continued strong demand for the nation’s mineral and energy resources as many Western nations move away from Russia to find alternative sources of supply.
Australia’s Minister for Resources and Northern Australia, Madeleine King, recently stated that the fallout from Russia’s ongoing invasion of Ukraine had cut global supply and boosted global prices, but Australia has remained a stable and reliable source of resources and energy.
“Australia’s resources and energy sector continues to underpin Australia’s economy and to support international energy security during the global turbulence caused largely by Russia’s invasion of Ukraine,” Minister King said.
“Iron ore exports continue to be the strongest performer, although prices have eased since the peak in mid-2021. Total iron ore export earnings are estimated at about $133B in 2021–22, reflecting a rebound from cutbacks in China’s steel industry in the second half of 2021.
“However, the value of iron ore exports is expected to moderate further in 2023–24, as prices ease toward their historical average below US$100/t.”
Recent reports from Australia’s Department of Industry, Science and Resources (DISR), found that international demand has led to a further surge in the price and export value of many of the country’s commodities over the past three months.
At the same time, commodities that are essential for electric vehicles (EVs), batteries, and the transition to cleaner energy are also experiencing strong demand growth, with the value of lithium exports forecast to more than double by 2023-24. Australia’s resources and energy export earnings are forecast to hit a record A$419B in 2022–23, after reaching an estimated A$405B in 2021–22.
However, the DISR tips export earnings to ease to around A$338B in 2023–24, as improving global supply pushes commodity prices back to more normal levels. The department reported that Australian coal export earnings are also estimated to have more than doubled from the previous year to around $100B in 2021–22.
Commodities such as lithium, nickel, and copper, which are also critical to transitioning to cleaner energy sources, have also achieved record high prices. Combined export earnings of three are estimated to have reached about $23B in 2021–22, an increase of 39% from 2020–21.
Lithium demand is also being driven by surging global EV sales, which doubled to 6.6M in 2021. Lithium export earnings are estimated to have reached $4.1B in 2021–22 and are forecast to more than double to $9.4B in 2023–24.
Earnings
Australia’s resource and energy exports are estimated at a record $310B in 2020–21, with almost half of those earnings coming from iron ore alone. This is a very strong result in the context of the global COVID-19 pandemic. In 2021–22, a further significant rise in exports to $334B is forecast, before moderating world economic growth and falling prices reduce exports to just below $304B in 2022–23.
The DISR noted that the rollout of COVID-19 vaccines in the major nations/regions is now steadily allowing a rebound in the services side of the world economy, where many sectors (such as land and air-based tourism and hospitality) were more heavily impacted than goods markets. Gasoline and jet fuel – and hence oil – demand is picking up accordingly. The pent-up demand for goods, and strong dwelling and infrastructure spending in many countries, is set to see strong demand for steel and non-ferrous metals for some quarters yet.
Australian iron ore earnings appear to have surged by almost 50% to an all-time high in 2020–21: after topping the $100B mark (for the first time ever for any commodity) in 2019–20, iron ore export earnings are forecast to rise to $149B in 2020–21. Base metal prices have all surged back above levels reached just before the COVID-19 pandemic; strong demand and worries over higher taxes on South American miners have raised fears of a fall in mining investment in the continent, boosting the copper price to over US$10,000/t.
The department says that coal markets continue to adjust to China’s informal import restrictions on Australian coal. Thermal coal prices have surged in China, as a critical shortage emerges ahead of the Northern Hemisphere summer – when cooling demand raises the need for increased power output. Surging demand from steel producers has seen Australian metallurgical coal prices regain all the losses incurred as a result of China’s informal import restrictions.
However, it was also noted that downside risks to the export earnings forecasts include a spike in global inflation and a sharper than expected tightening of monetary policy, and substantial delays in the successful rollout and take-up of effective COVID-19 vaccines to many of the world’s working population.
Another downside risk is the extent of further disruption to Australian resource and energy commodity trade with China, which took 45% of such Australian exports in 2020.
Commodity price concerns
The unknowns facing commodity prices is certainly front of mind with Australian miners. A new risk survey by KPMG has found that commodity price risk is the major concern for the year ahead for Australian miners.
According to the latest KMPG Australia Mining Risk Report FY 2022/23, Australian mining leaders showed commodity risk in first place for the third year in a row with two new risks, financial risks (decarbonizing the supply chain) and competition for talent coming into second and third place, respectively.
“Commodity prices are an ongoing concern for miners both in Australia and overseas,” said Nick Harridge, head of mining and metals at KPMG Australia.
“It’s not a surprise to see resourcing talent and skills coming into the top three risks for the first time, together with concerns around decarbonization and ESG matters.”
Interestingly, commodity price risk remained at number one in the eyes of Australian respondents, through a high price environment and one that is open to instability from rising geopolitical tensions, genuine conflict, or sector wide energy transition.
The survey identified supply chain risk, which is having a significant impact on many Australian explorers and miners, continues to feature globally as miners and contractors become more accustomed to longer lead times from global supply chains disrupted by the pandemic and other factors.
