Oversupply and slowing demand: that’s the story the Australian government says will keep prices of some of the nation’s most valuable exports down for the next few years.
In its September quarter report, The Bureau of Resources and Energy Economics (BREE) said global commodity supply had grown significantly over recent years, placing pressure on prices in the medium term.
It said producers will need to continue to focus on managing costs and improving their competitiveness in order to survive downturn in the price cycle.
We break down BREE’s predictions for some of Australia’s most important mineral exports.
“A rapid increase in iron ore supply combined with moderating growth in China’s steel production have pushed iron ore prices lower in 2014. Prices have fallen nearly 40 per cent down from around US$130 a tonne (CFR China) in January to US$82 a tonne in September,” BREE said.
While the group said iron ore price volatility is not uncommon, this difference this time is the oversupply flooding the market.
In Australia alone over 200 million tonnes of new ore has begun export at the same time as China stopped stocking up on the commodity like it used to.
Credit market conditions in China has affected end-user demand for steel, BREE said, so growth in the sector has been sluggish.
While BREE expects iron ore prices to rebound from current lows, it said highs of $US130 are unlikely to be repeated any time soon.
Iron ore prices are forecast to average US$94 a tonne for the full year 2014, down 26 per cent relative to 2013.
Over the next 5 years, iron ore prices are projected to average between US$90 and US$95 a tonne.
“Further increases in supply indicate increasing price competition will be needed to push more high cost supply out of the market over the next two years,” BREE said.
In 2013-14 Australia’s iron ore export volumes increased by 24 per cent to 652 million tonnes and this increased export value 31 per cent to $74.8 million.
“Metallurgical coal spot prices declined steadily over the first eight months of 2014 in response to a combination of increased supply and lower import demand from China,” BREE said.
Australian benchmark contract prices for high-quality metallurgical coal settled at $US120 in the September quarter, and BREE said many coal operations are unprofitable at this price level.
BREE said weakness in Chinese real-estate would persist throughout 2015, preventing any rapid price rise in coking coal prices.
Metallurgical coal contract prices are forecast to decline by 2.6 per cent to average US$123 a tonne in 2015.
From 2016, the market balance is expected to tighten as China’s real estate sector begins to recover and a prolonged period of oversupply comes to an end through the closure of high-cost operations. The metallurgical coal contract price is projected to rise modestly to US$130 a tonne (in 2014 dollar terms) by 2019.
Australia’s exports of metallurgical coal increased by 17 per cent to 181 million tonnes in 2013-14.
Exports are forecast to increase by a further 2 per cent to 185 million tonnes in 2014-15. The value of these exports is forecast to remain steady at around $23.2 billion.
“Thermal coal prices declined steadily throughout early 2014 in response to surplus supply, with Newcastle free on board spot prices averaging US$73 a tonne in the first eight months of 2014, down 16 per cent year on year," BREE said.
Large domestic producers reduced their price to domestic utilities in the first half of the year, contributing to reduced demand.
Coal prices are expected to remain ‘subdued’ for the rest of 2014 as demand remains sluggish coupled with an abundance in supply.
BREE said some coal operations are unprofitable at this level, and said cost-cutting in the form of mine closures or production slow downs would become common.
Contract prices are expected to decline by 6 per cent to settle at US$77 a tonne. From 2016, the market balance is expected to tighten as import demand continues to increase and lower prices during 2014–2015 reduce investment in new capacity and force less competitive operations to close.
The contract price is projected to rise to US$86 a tonne (in 2014 dollar terms) by 2019.
Exports are forecast to increase by 1 per cent to 196 million tonnes in 2014-15 reflecting moderate production growth. The value of these exports is forecast to decline by 9 per cent to $15.1 billion.
BREE expects Australian economic growth to moderate to 2.5 per cent in 2014/15, from 3.1 per cent last financial year.
It said mining was the key contributor to Australia’s economic growth in 2013-14.
“Capital expenditure, particularly in resources and energy projects, has been a key contributor to Australia’s economic growth over the past several years. As these projects are completed and Australia transitions to a period of higher commodity production, exports of resources and energy commodities and sustained high levels of residential construction activity will be the key drivers of GDP growth over the medium term.”