trending Market Intelligence /marketintelligence/en/news-insights/trending/czfmumngbcgayqvtcuubqq2 content esgSubNav
Log in to other products

 /


Looking for more?

Contact Us
In This List

Australia's coal, iron ore investment to rise, says Westpac economist

Blog

COVID-19 Impact & Recovery: Private Equity

Blog

Lithium prices rally cobalt prices correct

Blog

COVID-19 Impact & Recovery: Investment Banking

Blog

COVID-19 Impact & Recovery: Governments


Australia's coal, iron ore investment to rise, says Westpac economist

Australia's Westpac bank says further major coal investments are likely Down Under after the federal government revealed on July 2 that the commodity would top iron ore as the country's biggest export earner in 2018-19, though that mantle is not expected to last amid lower price forecasts and mining investment having "bottomed out."

The Office of the Chief Economist's June 2018 Resources and Energy Quarterly forecast that while coal will be Australia’s largest export earner at A$58.1 billion in 2018-19 with iron ore exports to earn A$57.7 billion, that dominance will end when iron ore exports rise to 887 million tonnes in 2019–20.

While the value of those iron ore exports is forecast to fall to $55 billion in 2019–20 as the impact of lower prices more than offsets growth in export volumes, that will still be more than thermal and metallurgical coal's combined revenue of A$51 billion for that period.

While high prices are expected to drive Australia’s thermal coal export earnings up to a record A$23 billion in 2017–18 with global supply growth dominated by Australia, Russia and the U.S., the quarterly said investors will "only reluctantly fund" new capacity; then Australian export volumes should remain "broadly steady" at 201 million tonnes in 2019-20.

Analysis by consulting firm Commodity Insights for the Minerals Council of Australia, or MCA, issued in June forecast import demand for thermal coal alone across Asia could expand by up to 400 million tonnes more than current levels by 2030.

Greg Evans, MCA's executive director coal, said in a July 2 statement that the high-energy, low ash qualities of Australian coal ideally match the needs of the many "high efficiency, low emissions" coal-fired power plants being built throughout Asia, and Australia's high-grade metallurgical coals are among the best in the world for modern steel making.

Having been estimated to reach a record A$38 billion in 2017–18, the government's quarterly forecasts metallurgical coal earnings to decline to A$32 billion in 2019–20, as lower prices offset rising export volumes.

Yet Westpac Senior Economist Justin Smirk told S&P Global Market Intelligence that both coal and iron ore have a "more positive investment cycle coming through," and while he expects commodity prices to fall, "the margins are still very large in that industry so the potential for expansion remains" in the coal sector.

However, he warned there was much uncertainty with the government's forecasts and that it is possible that Trump administration's steel tariffs could push metallurgical coal prices higher through 2019, and a possible lift in U.S. steel production could turn the country into a coke or metallurgical coal importer rather than a met coal exporter.

This uncertainty also extends into the iron ore sector, where many of the mines in Western Australia have been "run down quite a bit," and have reached the point in their investment cycle where producers are focusing more on sustaining existing production and improving operational efficiencies.

This is the case with BHP Billiton Group recently approved ithe US$2.9 billion development of its South Flank iron ore project, part of the Area C property in Western Australia to fully replace production from the 80 million-tonne-per-year Yandi mine.

The Office of the Chief Economist expects mining investment to have declined by around 5-10% in 2017–18 to around A$35 billion following several years of sharp declines from the 2012–13 peak, when investment reached A$95 billion.

Gold and nickel to shine

Gold is a different story, with a weaker Australian dollar supporting Australian-dollar gold pricing, though the gold price did recently drift below the US$1,310-1,360/ounce range it had traded since early this year. Regardless, Smirk believes the Australian-dollar gold price should ensure the country's miners see plenty of upside.

Though the Office of the Chief Economist expects the rising U.S. dollar and higher real U.S. Treasury bond yields to weigh on gold prices over the next two years, rising inflation and growing investor caution over the outlook for the global economy are expected to raise the demand for gold.

While Smirk also sees some risks around nickel and copper, "there's definitely some bias toward nickel" where the risks are "more asymmetric and more to the upside in the near-term than to the downside."

He said Australia's nickel sulfide deposits have potential to outperform as expansion continues not just in not just electric vehicles, but in the battery storage coming online in the world's power networks to back up renewable energy, a factor Smirk said "people forget about" in the hype around electric vehicles.

Strong prices, rising mined and refined production should see Australia’s nickel export earnings lift from A$2.3 billion in 2017–18 to A$2.8 billion by 2019–20.