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Indian steel demand a boon for Australian coking coal miners amid broader growth

Australia's mining investment will pick up over the next two years from the "trough" it is currently in, while the country's coking coal miners can expect a healthy future due to India's thriving steel demand, the Reserve Bank of Australia told miners June 5.

Alexandra Heath, head of the Reserve Bank of Australia's Economic Analysis Department, told the Association of Mining and Exploration Companies Convention in Perth, Australia, that while China's steel intensity is already plateauing, India's population growth and related urbanization will drive steel demand for decades.

Heath said there is also significant potential for the steel intensity of the economy to increase in India, which is expected to become the world's most populous country by 2030.

Though the two largest steel consumers after China are the U.S. and India, the latter has "significantly more potential" to impact steel demand growth going forward, Heath said.

"Even if somewhat slower growth is achieved, the demand for imported coking coal from countries like Australia could increase as India's coking coal reserves are relatively limited and is of relatively low quality," Heath said.

Meanwhile, India is already self-sufficient in iron ore and has relatively high quality hematite reserves.

Though China is still the largest steel consumer "by a considerable margin," accounting for about 80% of Australia's iron ore exports and a quarter of its coking coal exports, the Asian giant's population is expected to start falling in the medium to longer term.

This will cause the related industrialization and urbanization rates to slow, though Heath said demand from China's manufacturing sector is expected to "hold up."

Japan and South Korea's steel intensity levels have also been rising, but that is due to the fact that they have been able to become significant steel exporters, while India has a goal to triple steel production to around 300 million tonnes by 2030, most of which will merely meet domestic consumption.

Rising from the trough

The growth in coking coal demand will be part of what Heath sees as increasing investment in Australia's mining sector over the short term at least, from the "trough" the industry is currently in after investment declined since its latest peak in fiscal 2013.

Though Indian group Adani Enterprises Ltd. has continued to back its contentious A$2 billion Carmichael thermal coal project, Heath painted a bleaker picture of thermal coal as the world transitions to cleaner energy sources, even among the countries to which Australia exports the commodity.

BP PLC's 2019 Energy Outlook identified India as the largest growth market for coal, with its share of global consumption more than doubling to around a quarter in 2040.

Yet Australia's government forecasts thermal coal export earnings to fall in real terms to A$20 billion by fiscal 2024 as the impact of lower prices offsets higher export volumes.

Heath said iron ore and coking coal accounted for more than 40% of Australia's resources exports in 2018, up from about 20% in the early 2000s, while Australian government statistics for the March quarter forecast the country's thermal coal export earnings forecast to reach record highs in fiscal 2019.

Japan, China and South Korea together account for 75% of Australia's thermal coal exports, and Heath said that in all three countries, there are plans to shift toward cleaner energy sources, one of which is liquefied natural gas which has become an increasingly important export for Australia.

Heath also cited BP's 2019 Energy Outlook, which modeled a scenario about how energy demand could change where policies are broadly consistent with achieving governments' commitments to climate goals set out in the Paris agreement.

Under this scenario, there is a faster transition away from carbon-emitting energy sources, and Heath said Australia's thermal coal exports would therefore likely decline.

Though the impact of this transition on Australian GDP growth would be relatively small considering the offsetting benefits of liquefied natural gas exports and renewable energy, Heath warned about local coal mining communities which could be more severely impacted on a localized level.

"This can be particularly challenging if there are limited opportunities alternative employment, which is often the case in some of the coal mining areas," Heath said.