Bureau of Resource and Energy Economics Resource Program Manager John Barber presented "Outlook for Australian Resources and Energy Commodities" at the Karratha and Districts Chamber of Commerce and Industry's fourth annual Pilbara Pulse Economic Summit.

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Outlook for Australian Resources and
Energy Commodities
John Barber
Bureau of Resources and Energy Economics

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Overview
1. The importance of the mining sector to the Australian
economy – now and into the future.
2. The mining boom, where to from here?
3. Outlook for commodities.

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Mining strong in Q1 2014
-0.5 0 0.5 1 1.5
Mining
Financial and insurance
services
Construction
Manufacturing
Professional, scientific and
technical services
Contribution to growth, selected
industries: Mar 13 to Mar 14
Source: ABS Cat 5206.
The mining sector
accounts for around 10%
of Australia’s GDP.
The Australian economy
expanded 1.1% in the
March quarter and 3.5%
year-on-year (seasonally
adjusted), driven largely by
net exports.
The mining sector
contributed about 80% of
the growth in GDP during
the quarter.

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Demographic Shift:
Australia’s Population Distribution 2013
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
0
4
8
12
16
20
24
28
32
36
40
44
48
52
56
60
64
68
72
76
80
84
88
92
96
100
No.
People
Peak spending age
Peak in housing expenditure
Retirement
Lower income
Sell house
Lower consumption
First home buying
Source: ABS, Dent Research
The next
demographic
trough

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Gross Value Add Per Unit of Labour
0
100,000
200,000
300,000
400,000
500,000
600,000
A$
The Australian mining sector produces the best return on labour in the country. 2% of the
workforce generates 10% of GDP!
Each worker employed in the mining sector generates on average around $515,000 for the
economy.
As the Australian population ages, returns on labour will become increasingly important.
Source: ABS

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The Mining Boom
1. Elevated Prices
2. Increased Investment
3. Higher Output

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Commodity Prices
0
100
200
300
400
500
600
700
Index
Mar 00
= 100
Copper Aluminium Iron ore Thermal Coal
High price growth phase Prices decline
China joins WTO
GFC
Source: ABS, LME

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Investment in Australian Resources
Sector
1. Significance of the past decade
2. Outlook for future investment
3. Impact of cost cutting

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Comparative Project Costs
0
10
20
30
40
50
60
A$b
*Completed in the past 3 years

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50
100
150
200
250
300
20
40
60
80
100
120
Apr–04 Apr–06 Apr–08 Apr–10 Apr–12 Apr–14
number (left axis) value (right axis)
number
of
projects A$b
Committed investment declining
Source: BREE Resources and Energy Major Projects Report, April 2014
As at end April there were
48 projects worth $229
billion.
This is 15 projects and $11
billion lower than the
previous six months.
Projects are moving from
the construction phase to
the production phase.
21 projects were
completed in the six
months to April 2014,
worth a combined $25.6
billion.

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Declining Capital Expenditure
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
20
40
60
80
100
120
140
160
180
2007-08 2009-10 2011-12 2013-14
%A$b
Australia – Capital Expenditure
Non-mining Mining % share mining (rhs)
ABS estimatesActual
Source: ABS cat no 5625
-$26b

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1
2
3
4
5
6
7
8
2003 2005 2007 2009 2011 2013
Petroleum Minerals
A$b
Exploration activity declining
Total exploration
expenditure declined
by 8% to $7.1 billion in
2013.
Higher petroleum
exploration was more
than offset by a
substantial decline in
minerals exploration.
Minerals exploration
expenditure has
declined for 6
consecutive quarters.
Source: ABS

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Outlook for Australia’s Commodity
Exports
1. Iron Ore – 600 million tonnes and growing.
2. LNG – set to become largest exporter in the world.
3. Total value of mineral and energy commodity exports to
grow to $200 billion in 2014-15, $250 billion in 2018-19.
So how is the ‘boom’ over?

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Medium term outlook for Australia’s resources
exports
40
80
120
160
200
240
280
Real
A$b
energy resources
Growth in export values due to:
1. Higher volumes of bulk
commodities (iron ore and
coal)
2. Growth in LNG exports
3. Forecast more favourable
USD exchange rate.
Lower prices are forecast, which
will partially offset the increase
in volumes
Forecast total value of exports
in 2018-19 = $254 billion (in real
terms).
Source: ABS, BREE
Forecast

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Outlook for iron ore

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Iron Ore Price Cycle: Peaks and Troughs
0
40
80
120
160
200
Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014
US$/t
Peak
Trough
Peak
Peak
Peak
Trough
Trough
Trough
Trough
Peak
Peak
Source: Bloomberg
Peaks and troughs are a common part of the iron ore price cycle.
But since early 2011, the trend has been for lower peaks.
Trough
Peak
Trough

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China Real Estate – Floor Space
Started and Sold*
-40%
-20%
0%
20%
40%
60%
80%
Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
Started Sold
*3mma %yr
Source: CEIC
Housing
downturn
GFC response

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China Fixed Asset Investment Growth*
-60%
-40%
-20%
0%
20%
40%
60%
80%
Mar,
2012
Jun,
2012
Sep,
2012
Dec,
2012
Mar,
2013
Jun,
2013
Sep,
2013
Dec,
2013
Mar,
2014
Jun,
2014
Rail Manufacturing Real Estate
* 3mma %yr
Source: CEIC
Spending on rail is a key driver of the Chinese steel
and iron ore cycles.

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China Steel Production
-10%
-5%
0%
5%
10%
15%
20%
25%
40
45
50
55
60
65
70
75
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
%yrMt
Monthly Production (LHS) %yr (RHS)
Source: Bloomberg

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China Iron Ore Imports
-20%
-10%
0%
10%
20%
30%
40%
Year-on-Year % Change
0
20
40
60
80
100
Mt
Volume
Australia Brazil Other
Source: Bloomberg
Chinese New Year
data irregularities

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Australia’s iron ore export volumes - monthly
0
10
20
30
40
50
60
70
Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14
Mt
Trend line
Iron ore export volumes up 80% since April 2011!
Source: ABS

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Australia’s iron ore exports
20
40
60
80
100
200
400
600
800
1000
Real
A$bMt
volume value (right axis)
China’s steel industry expected
to continue growing, albeit at
lower rates.
Prices forecast to fall as more
supply from Australia and Brazil
enters the market.
Recent price falls not due to
lower demand. Iron ore prices
fluctuate with steel inventories.
Chinese government recently
announced fiscal packages to
continue urban development
that will support steel demand.
Source: ABS. BREE

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Outlook for Gas/LNG

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China – Forecast Gas Demand (by source)
China has many options
beyond 2020:
• coal/renewables/nuclear
• pipeline imports
• indigenous production
There are many potential
opportunities – and
roadblocks – to further growth
in LNG
Australian LNG can compete
by being cost competitive.
0
50
100
150
200
250
300
350
400
450
500
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Conventional production Shale/CBM
Other Pipeline Russian Pipeline
LNG
bcm
Source: Nexant; IEA; BREE

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Australia’s LNG exports
10
20
30
40
50
60
15
30
45
60
75
90
2008–09 2010–11 2012–13 2014–15 2016–17 2018–19
Real
$AbMt
volume value (right axis)
Export volumes to grow as new
projects come online.
Risk of schedule delays and gas
shortages for CSG projects.
Further onshore investment in
Australia is under pressure due
to rising costs. FLNG investment
still attractive but provides fewer
benefits to Australia in
construction phase.
US exports will have a major
impact on Asia-Pacific market,
especially prices.
Conflict in the Ukraine may result
in US LNG exports being
directed to Europe.
Source: ABS, BREE

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Thank you
John Barber
Senior Economist
Bureau of Resources and Energy Economics
john.barber@bree.gov.au
02 6243 7988
www.bree.gov.au