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Resourcesand Energy

QuarterlyMarch Quarter 2013

Acknowledgements

The macroeconomic outlook, the individual commodity outlooks and the reviews have identified BREE authors. The statistical tables were compiled and generated by the Data & Statistics Program at BREE and led by Geoff Armitage. Design and production was undertaken by the Media and Parliamentary team at the Department of Resources, Energy and Tourism, Tom Shael and the BREE Data & Statistics Program.

BREE 2013, Resources and Energy Quarterly, March Quarter 2013, BREE, Canberra, March 2013.

© Commonwealth of Australia 2013

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ISSN 1839-499X (Print)

ISSN 1839-5007 (Online)

Vol. 2, no. 3

Postal address:Bureau of Resources and Energy EconomicsGPO Box 1564Canberra ACT 2601 AustraliaPhone: +61 2 6276 1000

Email: [email protected]: www.bree.gov.au

http://bree.gov.au/documents/publications/req/www.bree.gov.au

mailto:[email protected]

ForewordThis is BREE’s second five-year projection of mineral and energy production, exports and values. In addition to a five-year outlook for each of Australia’s major mineral and energy exports, an overview of the global macro-economy is provided along with three review articles and a set of detailed statistical tables from 2010–11 to 2012–13 on production, export volumes, prices and values of key resource commodities. The three reviews include contributions on: global thermal coal markets, a short history of nickel in Australia, and an overview of biofuels.

Over the outlook period (2012–13 to 2017–18) both the real and nominal values of Australian mineral and energy exports are projected to increase. The real value of Australia’s energy exports are expected to rise by over half from 2011–12 and 2017–18. The biggest single contributor to this growth is LNG exports which are expected, in both nominal value and volume terms, to increase at an annual rate of over 30 per cent over the next five years, and be worth more than $60 billion in 2017–18. Both thermal coal and metallurgical coal exports are also expected to rise in nominal value terms by, on average, 8 per cent and 4 per cent per year over the outlook period.

The nominal value of mineral exports is projected to increase by about 15 per cent from 2011–12 to 2017–18, but the real value of mineral exports in Australian dollars is expected to peak in 2014–15 at around $123 billion (in $2012–13). The assumed continuation of a high-valued Australian dollar and a fall in the US$ price of iron ore over the outlook period are the principal cause of this dip in the real export values of minerals from 2014–15. This expected decline in real terms occurs despite a projected average annual increase in the volume of iron ore exports from Australia of about 10 per cent per year from 2011–12 to 2017–18.

A fall in the export price of key Australian mineral exports from their peaks in 2011, coupled with a high Australian dollar, is expected to result in a 3 per cent decline in the nominal export value (in Australian dollars) of resources and energy exports in 2012–13, relative to 2011–12. The total projected value of resources and energy exports in 2012–13 is about $186 billion, some $6 billion less than in 2011–12. As a result of a strong projected increase in export volumes of Australia’s bulk commodities the nominal value of Australia’s energy and mineral exports is expected to reach a record $205 billion ($199 billion in $2012–13) in 2013–14.

Quentin GraftonExecutive Director/Chief EconomistBureau of Resources and Energy Economics

ContentsForeword..................................................................................................................................3

Energy outlook........................................................................................................................17

Oil.......................................................................................................................................17

Gas......................................................................................................................................26

Thermal coal.......................................................................................................................33

Uranium..............................................................................................................................40

Resources outlook..................................................................................................................47

Steel and steel-making raw materials.................................................................................47

Gold....................................................................................................................................58

Aluminium..........................................................................................................................64

Alumina...............................................................................................................................68

Copper................................................................................................................................71

Nickel..................................................................................................................................78

Zinc.....................................................................................................................................84

Reviews...................................................................................................................................90

An introduction to thermal coal markets............................................................................91

Nickel: a short history.........................................................................................................97

Biofuels: An overview.......................................................................................................103

Statistical tables....................................................................................................................111

BREE contacts.......................................................................................................................113

Macroeconomic outlook update and energy and minerals overviewNhu Che, Quentin Grafton, Pam Pham, and Tom Willcock

Global economy: increased confidence but risks remainGlobal economic growth is projected to improve and is assumed to be 3.6 per cent for 2013, to increase to 4.1 per cent in 2014, and to reach 4.5 per cent in 2018. Despite better global growth prospects, risks remain, particularly in Europe. The Eurozone economy is likely to shrink in 2013 with further contractions in Italy, Spain, Portugal and Greece this year while France’s output is expected to barely grow and result in a delay in the implementation of its planned austerity targets. The outcome of the February 2013 election in Italy also casts doubt on the ability of democratically elected governments to implement fiscal consolidation and austerity measures and to be subsequently re-elected.

The ongoing debt crisis in the European Union (EU) and its spill-over to the real economy and large exporting countries, such as China, along with lingering worries about US fiscal consolidation remain key concerns for the short-term economic outlook. Spill-overs from below trend economic growth in developed economies in 2012 and domestic challenges, especially inflation concerns, have constrained activity and fiscal flexibility in some emerging market and developing economies. Nevertheless, robust growth in developing economies of 5.8 per cent in both 2012 and 2013 is expected by the IMF and should support resource and energy prices and volumes over the foreseeable future.

On the positive side, and within developed economies, the spread between bonds issued by debt-troubled Euro members and German bonds have noticeably fallen since the European Central Bank announced its Outright Monetary Transactions program and is prepared to undertake an unlimited asset purchases program. Perceived inter-bank risk has also diminished with a decline in the spread between the London interbank offered rate (Libor) and the overnight indexed swap rate (OIS). Equity markets, especially in the US, have also recovered sharply over the past few months—a proximate cause is the record monthly inflows into US-listed mutual funds and exchange traded funds. These inflows indicate a growing confidence by investors of future earnings growth. Supporting this investor confidence is record-low interest rates in most developed economies that have made the cost of debt servicing the lowest it has been for decades.

Overall, growth in the developed economies is expected to increase to 2.1 per cent in 2013 and to rise to 2.4 per cent over the period 2014–2018. Japanese growth remains weak, but the 11 January 2013 announcement by the Abe government of a 20 trillion yen stimulus package and the announcement on 22 January 2013 by the Bank of Japan to change its inflation target to 2 per cent from its current 1 per cent, and also undertake asset purchases, have contributed to greater investor confidence. The declared fiscal expansion and anticipated monetary easing have

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helped to increase valuations in Japanese equities and contributed to a decline in the yen against most major currencies. It is too soon to judge whether the planned monetary easing and what will be the 15th stimulus package since 1999, will contribute to higher sustained higher economic growth. Assumed GDP growth for Japan for 2013 is 1.3 per cent with an average growth of about 1.1 per cent assumed for the period 2014–18.

Better than average growth performance of developed economies is expected for the Russian Federation, the US and the UK. Despite a slight fall in output in the fourth quarter 2012, attributed to a decline in exports and a fall in government spending, US growth is expected to increase from its level in 2012. Positive aspects of the US growth trend include increasing business investment which is rising at about 8 per cent per year and consumer spending growing at an annual rate of 2.2 per cent in the fourth quarter 2012. Other positive news for the US includes private debt levels as a proportion of GDP returning to 2003 levels and after-tax income is growing at its fastest rate since the Global Financial Crisis. Further, at the start of the New Year the White House and Congress came to an agreement on fiscal consolidation that, in the absence of an accord, would have resulted in spending cuts and tax increases that may have been detrimental to short-term growth and business confidence.

Emerging economies, particularly those in Asia are expected to contribute an increased share of world economic output over the outlook period and the prospect for emerging-market economies remains strongly positive. Most of Latin America experienced robust economic growth in 2011 and while this moderated in 2012, it is expected to regain strength and an average growth rate of around 4 per cent per year is assumed over the outlook period.

Figure 1: World economic growth

Please refer to page 3 of the Resources and Energy Quarterly – March quarter 2013 PDF version.

In non-OECD Asia, economic growth is expected to recover slightly from 2012 with an overall average annual growth rate of almost 7 per cent. India and China, in particular, are expected to maintain very high growth rates. India is assumed to grow at 6 per cent per year over the period 2013–18 while China’s assumed growth rate is 7.5 per cent is consistent with the Chinese government target for GDP growth in 2013. This target represents stated Chinese government policy to ensure strong economic growth and price stability.

Near-term growth in ASEAN countries that include Indonesia, Malaysia, Philippines, Thailand, and Vietnam is assumed to be around 6.0 per cent supported by strong domestic and foreign investment. Robust economic growth from the Republic of Korea is expected with an assumed GDP growth of 3.6 per cent in 2013, and an average assumed growth of about 4.1 per cent over the period 2014–18.

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Table 1: Key macroeconomic assumptions for resources and energyunit 2011 2012 2013 a 2014 a 2015 a 2016 a 2017 a 2018 a

Economic growth bcOECD % 1.3 1.4 2.1 2.4 2.4 2.4 2.4 2.4United States % 1.8 2.2 2.1 3.0 3.4 3.4 3.3 3.3Japan % –0.8 2.3 1.3 1.1 1.2 1.1 1.1 1.1Western Europe % 1.3 0.3 1.1 1.5 1.6 1.6 1.6 1.6Germany % 3.2 1.0 0.9 1.4 1.4 1.4 1.3 1.3France % 1.7 0.1 0.4 1.1 1.5 1.8 1.9 1.9United Kingdom % 0.8 –0.4 1.1 2.2 2.6 2.6 2.7 2.7Italy % 0.4 –2.3 –0.7 0.5 1.2 1.4 1.4 1.4Korea, Rep. of % 3.6 2.7 3.6 4.1 4.1 4.1 4.1 4.1New Zealand % 1.1 2.2 3.1 2.7 2.6 2.3 2.3 2.3

Developing countries % 6.6 5.8 5.8 5.8 5.9 5.9 5.9 5.9

Non-OECD Asia % 7.7 6.5 6.8 6.8 6.9 6.9 6.9 6.9 South East Asia d % 4.5 5.4 5.8 5.7 5.7 5.9 6.0 6.0 China e % 9.2 7.8 7.5 7.5 7.5 7.5 7.5 7.5 Chinese Taipei % 4.1 1.3 4.0 4.6 4.8 4.9 5.1 5.1 Singapore % 5.0 2.1 3.0 3.7 3.8 3.9 4.0 4.0 India % 6.8 4.9 6.0 6.0 6.0 6.0 6.0 6.0Latin America % 4.5 4.5 3.2 3.9 4.1 4.0 4.0 4.0Middle East % 3.5 3.3 5.3 3.6 3.8 4.3 4.5 4.5Russian Federation % 4.3 3.7 3.8 3.9 3.9 3.8 3.8 3.8Ukraine % 5.2 3.0 3.5 3.5 3.5 3.5 3.5 3.5Eastern Europe % 5.3 5.3 2.0 2.6 3.2 3.5 3.7 3.7

World c % 3.8 3.3 3.6 4.1 4.3 4.4 4.5 4.5

Industrial production bOECD % –0.5 1.0 1.2 1.2 1.1 1.1 1.1 1.1Japan % –0.9 7.1 5.9 5.3 4.5 4.0 4.0 4.0China % 9.9 8.8 9.4 9.4 9.3 9.2 9.1 9.1

Inflation rate bUnited States % 4.3 3.1 1.9 1.0 1.0 1.3 1.4 1.4

Interest rateUS prime rate g %pa 3.3 3.3 3.3 3.4 3.5 3.5 3.5 3.5

a BREE assumption. b Change from previous period. c Weighted using 2012 purchasing power parity (PPP) valuation of country gross domestic product by IMF. d Indonesia, Malaysia, the Philippines, Thailand and Vietnam. e Excludes Hong Kong. g Commercial bank lending rates to prime borrowers in the United States.Sources: BREE; Australian Bureau of Statistics; International Monetary Fund; Organisation for Economic Cooperation and Development; Reserve Bank of Australia.

Economic prospects in Australia’s major mining export markets

Non-OECD economies

A number of Chinese Government policies are expected to constrain growth in 2013 to levels below the average rate over the past decade. Key stated objectives of the Chinese government include keeping the annual inflation rate at or below 3.5 per cent and the fiscal deficit at about 2 per cent of GDP. Fixed asset investment (FAI) in

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2013 is expected to rise to 21 per cent from 18 per cent in 2012 which will stimulate infrastructure investment and help to offset a dip in a key index of Chinese manufacturing in February 2013.

Over the longer term, as outlined in its five year plan, the Chinese government is specifically focusing on ‘higher quality growth’ that includes further actions to improve air quality and reduce the growth in greenhouse gas emissions, tax reform, the promotion of market-based reform in terms of the setting of interest rates and foreign exchange rates, and steps to resolve increasing wealth disparity.

The current annual inflation rate in China, based on the most recent monthly statistics, is 3.2 per cent and is close to the targeted maximum of 3.5 per cent. Much of the recent rise in the price level is attributable to food prices which have increased about 6 per cent over the past year. A matter of concern is that new credit on an annual basis has quadrupled since 2007 while private credit has risen to about 180 per cent from 130 per cent in 2008. Consistent with the Chinese government’s stated aim to achieve price stability, current price and credit growth is likely to limit the scope for fiscal expansion possible such that economic growth is assumed to be at its target level of 7.5 per cent.

The continued expansion of industrial production and infrastructure developments in China are expected to support growth in energy and minerals consumption over the medium term. The growth of resource intensive industries such as electricity generation and steel, pig iron and cement production is expected to remain robust over the outlook period even if investment as a share of GDP were to decline to pre-GFC levels by 2018. Over the long term, China’s growing technological prowess will support structural change in the economy. Continuing strength of the Chinese economy, Australia’s largest export market for resources and energy, will be important to maintain projected volumes and high commodity prices over the outlook period.

Figure 2: Economic growth in Australia’s major resource and energy export markets


Box 1: Fiscal Cliff and US Sequestration

Fiscal consolidation is the process of reducing the government deficit and growth in the public debt. It represents the reversal of fiscal expansion which is the typical response to reduced domestic and external demand. Fiscal consolidation is under way in most G20 countries, but at different speeds. In the US, the Republican controlled House of Representatives has wanted fiscal consolidation to occur at a faster rate than that proposed by President Obama. This dispute recently came to a head with the so-called ‘fiscal cliff’ which would have resulted in tax increases and spending cuts of about US$600 billion and may have adversely affected growth in 2013. In a last minute agreement both the White House and Congress at the start of

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2013, agreed to compromise on fiscal austerity. As part of this agreement, sequestration—automatic spending cuts set to take place across the federal government—were delayed for two months. As of March 12 2013, the US sequester is being implemented and involves across-the-board cuts in key agencies of about $85 billion in 2013 as well as additional cuts worth $109 billion over the next 8 years. The current sequester crisis is reminiscent of the 2011 debt ceiling crisis which was also a dispute about the direction of fiscal policy between the President and Congress and which contributed to the downgrade of US debt by a key ratings agency.

Sources: IMF; Reserve Bank of Australia; National Bureau of Statistics of China.

Over 2012 Indian economic growth moderated, in part, as a result of government policies intended to combat rising inflationary pressures, but also due to weaker external demand and a decline in business confidence. Economic growth, however, is expected to pick up and is assumed to be 6.0 per cent in 2013 and to remain at that level from 2014–2018.

OECD economies

The German economy remains central to Western European demand for resources and energy commodities. It is a matter of some concern, therefore, that according to the German Federal Statistical Office its economy contracted 0.60 per cent in the fourth quarter of 2012. The German economy is heavily export-oriented and is the second largest exporter in the world with exports accounting for more than one-third of national output. As a result of weaker global demand in 2012 and the European sovereign debt crisis Germany’s economy shrank at the end of 2012, but data from January 2013 indicate that its exports are rising at the fastest rate for the past 5 months. Further improvements in export growth should support faster growth in 2013 assumed to be 0.9 per cent, and a higher average growth rate assumed to be about 1.4 per cent over the period 2014–2018.

In Greece, Italy, Portugal, and Spain, fiscal tightening, banking system concerns, low consumer confidence and high unemployment are still having a negative impact on domestic demand. Outside of the Eurozone, the UK economy is assumed to improve over the medium term and to grow, on average, about 2.6 per cent over the period 2014–18. France, the second largest economy in the Eurozone, experienced stagnant economic growth in 2012, but its prospects are expected to improve over the outlook period and its growth is assumed to be 1.9 per cent per year by 2018. Over the period 2014–18, annual economic growth in Western Europe is assumed to be 1.6 per cent per year, a level slightly above the assumed German growth rate.

The US economy continues to recover supported by increases in consumption and business investment, and forward-looking indicators of economic activity are improving. Its unemployment rate is declining and there are increasing signs of recovery in the housing sector. Growing strength in both the US housing market and its manufacturing sector should increase demand for mining and energy commodities. In particular, housing starts increased from 478 000 units at the height

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of the global financial crisis to 720 000 units in January 2012 and 954 000 December 2012. Assumed very low nominal interest rates over the next two years are also expected to provide on-going stimulus to business investment.

Despite its growing strength the US economy faces some short-term downside risks. The primary challenge is to undertake fiscal consolidation without jeopardising economic growth. The March 2013 sequester – which legislates arbitrary Government spending cuts – has created uncertainty about how fiscal consolidation will occur and whether the cuts will be directed to where they are most needed. On the basis that a sustainable plan for fiscal consolidation will be implemented over the outlook period it is assumed that US GDP grows at 2.4 per cent year over the period 2014–18.

Commodity prices

Commodity prices increased substantially in 2010 and rose again, but at a slower rate, in 2011. As a result of weakness in the global economy prices of most commodities declined in 2012 relative to their peaks, but still remained at historically high levels. In addition to a dip in prices 2012–13, relative to their peaks, there has been increased volatility in the USD prices of some key commodities exported by Australia, most notably iron ore.

Gold demand as a reserve and for speculative purposes provided underlying support for gold prices throughout much of 2012. Increasing confidence in the global economy, especially the belief by some investors that the worst of the European debt crisis is over, has prompted some investors to move from gold to other assets. This should contribute to a decline in the gold price over the outlook period. By contrast, most other metals (aluminium, lead, nickel and zinc) are expected to maintain current price levels although the copper price is projected to decline over the 2014–18 period.

In terms of bulk commodities, both thermal coal and metallurgical coal are projected to, more or less, maintain their first quarter 2013 price levels. The exception to this trend is iron ore which is projected to maintain its price volatility, but its average price level is expected to decline over the outlook period.

Figure 3: Metal prices


Figure 4: Bulk commodity prices


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Demand for resources and energy commodities

Global resource and energy commodity demand is expected to increase marginally in 2013 despite notable downside risks associated with recovery in Europe and political debate about the speed of fiscal consolidation in the US.

An apparent resolution of the fiscal cliff (see box) combined with improving GDP growth, stabilising unemployment, and rebounding industrial production following a sharp dip caused by October’s Hurricane Sandy, bode well for increased US prosperity. Nevertheless, some concerns remain, particularly in terms of ensuring a stable and sustainable fiscal environment over the outlook period.

Recent production growth in Japan, spurred by reconstruction activity, is likely to moderate in 2013. Offsetting this effect is the recent announcements of a stimulus package that is expected to support economic growth in 2013.

Chinese growth remains the lynchpin of global bulk commodity demand. Asian demand will also be supported by non-OECD growth, particularly within ASEAN countries. In particular, Thailand and Vietnam are likely to be key growth economies with industrial production assumed to increase from 4 to 5.5 per cent and from 6.5 to 7.2 per cent, respectively in 2013. Indian growth is also expected to improve from 2012 and is assumed to grow at a robust 6 per cent from 2013 to 2018.

Crude oil, gas and thermal coal demand are all expected to grow over the outlook period. Much of the growth will occur in the Asia Pacific, and in particular in China and India.

Supply for resources and energy commodities

The global supply of resource and energy commodities is expected to grow at a faster rate than the previous decade. In particular, resources and energy projects financed during the record high commodity prices of 2011, and before, will come to fruition during the outlook period. Global growth in iron ore production is projected to be particularly strong. Fortescue Metals Group, Rio Tinto and BHP Billiton, three dominant players in the world’s largest iron ore export market—Australia—continue to expand their capacity through mine, transport and export infrastructure investments. Brazilian miner Vale is also expected to substantially expand its iron ore production, particularly later in the outlook period.

Metallurgical coal supply, linked to iron ore because of their concurrent use in the steal making process, will be supported by substantially higher Australian output over the outlook period. Thermal coal supply has grown strongly over the past decade, but its growth may begin to slow by the end of the outlook period as a result of fuel switching and increased electricity generation from renewables.

Growth in oil supply is expected over the outlook period, especially from non-OPEC sources including the US, Canada and Russia and also from a key OPEC member, Iraq. Increased unconventional gas production in North America and high gas prices in

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potential export markets is expected to result in substantial LNG export volumes by the end of the outlook period, particularly into the Asia Pacific region.

Australia’s economic prospects

Based on ABS data, the Australian economy grew 0.6 per cent over the last quarter of 2012 and enjoyed a growth rate of 3.1 per cent for 2012. In terms of real GDP, based on purchasing power parity (PPP), Australian economic growth for 2011–2012 was 2.9 per cent. Based on IMF forecasts, it is assumed that Australian economic growth will improve slightly to 3 per cent in 2012–13, and average 3.3 per cent over the period 2013–14 to 2017–18.

Recent economic data suggest that the mining sector will continue to perform strongly in terms of both volumes of exports and growth in capital investments. Overall, Australian domestic demand continues to grow at a positive rate, although the high level of the exchange rate, and changes in household spending and borrowing behaviour has had a negative effect on some sectors. As a result, the Reserve Bank Board lowered its target for the cash rate by 25 basis points in October 2012 and by the same amount in December 2012 to its current level of 3.00 per cent, but has so far kept the cash rate unchanged in 2013.

Over the outlook period, growth in the Australian economy is expected to be supported by mining-related activities. Historically high levels of mining investment are expected to continue, but are likely to peak over the next couple of years. In particular, large expansions to gas, iron ore and coal production capacity are underway, and are expected to contribute to robust growth in resource export volumes over the foreseeable future.

Table 2: Australia’s key macroeconomic assumptions for resources and energy

2011–10

2011–12

2012–13 a

2013–14 a

2014–15 a

2015–16 a

2016–17 a

2017–18 a

Economic growth b c % 1.8 2.9 3.0 3.3 3.3 3.3 3.3 3.3Inflation rate b % 3.1 2.7 2.9 2.9 2.9 2.9 2.9 2.9Interest rates d % pa 6.6 6.1 5.7 5.7 5.7 5.7 5.7 5.7Nominal exchange rates eUS$/A$ US$ 0.99 1.03 1.03 1.00 1.01 1.02 1.02 1.02Trade weighted index for A$ g index 74 76 76 74 74 75 75 75

a BREE assumption. b Change from previous period. c Weighted using 2012 purchasing power parity (PPP) valuation of country gross domestic product by IMF. d Large business weighted average variable rate on credit outstanding. e Average of daily rates. g Base: May 1970 = 100.Sources: BREE; ABS; RBA.

The Australian dollar increased slightly over the past six months from US 101c in June to US 104c in December 2012. In the March quarter 2013, the Australian dollar traded at around US 104c while the trade-weighted index was 78, or at levels very similar to the final quarter of 2012.

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Over the outlook period, it is assumed that the Australian dollar will remain at close to historic highs due to expected stronger economic growth in Australia, recovery in the EU economy and relatively low on-going interest rates in the US that should dampen demand for US dollars (see Figure 5). The demand for Australia’s exports in Asia, and market expectations about minerals and energy commodity prices, are also factors that will influence the value of the Australian dollar over the outlook period. Competitive currency devaluations that some countries view as a means to stimulate demand will also support the Australian dollar over the outlook. Factors that may cause the Australian dollar to weaken include reduced risks in the world economy that will undermine Australia’s status as a ‘safe haven’, a recovery of the US economy and further declines in domestic interest rates.

Figure 5: Australian exchange rate


The Australian mining industry

The gross value added, by chain volume measures, of the Australian mining industry was about 142.6 billion (in 2012–13 prices) in 2011–12, equivalent to about 10 per cent of Australia’s GDP. Of this total, mining activities and exploration and mining support services contributed $132.2 and $10.5 billion, respectively.

Figure 6: Australian mining industry gross value added, chain volume measures


Energy and minerals commodity exports account for a large proportion of Australia’s commodity exports. In 2011–12, energy and minerals commodity exports totalled $192.6 billion (in nominal dollars), and accounted for about 83 per cent of Australian total value of commodity exports. The principal importers of Australian energy and mineral commodities include China, Japan and the Republic of Korea.

Despite the fact that commodity prices moderated in 2012, relative to 2011, overall private new capital expenditure in the Australian mining sector continues to rise and in 2011–12 and was around $84.4 billion (in 2012–13 prices) with expected investment in 2013 to be in excess of $100 billion. The share of the mining sector as a proportion of new capital expenditure of Australia’s total industries has increased substantially over the past decade, rising from 15 per cent in 2001–02 to over 50 per cent in 2011–12. Much of this growth is underpinned by liquefied natural gas (LNG), coal and iron ore projects. Over the outlook period annual capital expenditures should remain at historic high levels as the mega LNG projects are completed although the stock of planned capital expenditures may be expected to peak in the near future and then gently decline.

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Figure 7: Investment in private new capital expenditure


As a capital-intensive industry, the share of the Australian mining industry in total employment is low, approximately 2 per cent over the past three years. The industry directly employed around 249 000 people in 2011–12, with the metal ore industry employing the largest number of people, followed by the coal industry, and the oil and gas extraction industry.

Figure 8: Employment in the Australian mining industry


Australian resources and energy commodities production and exports

In 2011–12, the overall index of Australian mine production was relatively stable, increasing by less than one per cent from 2010–11. This was the result of increased minerals production marginally offsetting a small dip in energy commodities production (primarily due to flooding in Queensland that reduced coal production).

Total Australian mine production is forecast to increase by 7 per cent in 2012–13 relative to 2011–12, primarily due to a 13 per cent increase in the output of energy commodities, particularly thermal coal, metallurgical coal and uranium. Also contributing to this growth will be a 2 per cent increase in the production of metals and other minerals, strongly supported by supply growth in iron ore.

Figure 9: Australian mine production


Export earnings from energy and minerals commodity exports increased by 5 per cent in real terms between 2010–11 and 2011–12, reaching some $198 billion (in 2012–13 dollars) in 2011–12. Of this total, export earnings from minerals commodities contributed $119 billion, accounting for about 60 per cent of the total. Export earnings from energy commodities accounted for a smaller share, 40 per cent, and contributed approximately $79 billion in real terms to the total value of Australian energy and minerals exports.

Figure 10: Australian energy and minerals export earnings


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In 2012–13, the total export earnings for energy and minerals commodities are forecast to decrease by 6 per cent to $186 billion due to slight falls in the export values for both energy and minerals commodities. Energy commodity export earnings are forecast to fall by 5 per cent to $74 billion in real terms, primarily as a result of falling commodity prices. A large drop in metallurgical coal earnings (down 25 per cent to $23 billion) will be somewhat offset by gains in thermal coal (up 3 per cent to $17.6 billion), LNG (up 36 per cent to $16.2 billion) and oil (up 8 per cent to $14.3 billion).

In 2012–13, minerals commodity export earnings are forecast to decrease by 4 per cent to $111 billion as a result of decreases in the export value of iron ore (down 9 per cent to $57 billion), aluminium (down 11 per cent to $3.4 billion and nickel (down 18 per cent to $3.3 billion). Partially offsetting the decreased export earnings for mineral commodities will be higher forecast export earnings for alumina (up 19 per cent to $6.1 billion), and gold (up 10 per cent to $17 billion). Over the outlook period, the real value of mineral export earnings is projected to peak at $123 billion (in 2012–13 dollars) in 2014–15 before declining to $116 billion in 2017–18. A fall in iron ore prices after 2014–15 is the principal cause of the decline in export earnings.

Over the medium term, the outlook for energy and minerals commodity exports remains robust. Investment in LNG production facilities will drive a surge in LNG exports over the outlook period and the commissioning of the Pluto LNG project in 2012 is expected to boost exports in 2013. Based on mining, rail and port infrastructure expansions currently under way, or in planning, significant growth in coal export capacity is expected over the next three years. The detailed outlook for major energy and minerals commodities is outlined in the following Resources Outlook and Energy Outlook sections of this report.

Table 3: Australia’s resources and energy commodity exports, by selected commodities

Volume ValueAnnual growth

Annual growth

unit2011–12

2017–18 z % unit

2011–12

2017–18 z %

CommodityAlumina kt 16592 20392 3.7 $m 5146 7774 7.4Aluminium kt 1693 1488 –2.1 $m 3797 3336 –2.0Copper kt 889 1155 4.5 $m 8501 11027 4.6Gold t 304 362 3.0 $m 15462 15028 –0.3Iron ore Mt 470 821 9.8 $m 62695 71054 2.4Nickel kt 240 276 2.5 $m 4056 5381 5.5Zinc kt 1572 1586 0.5 $m 2292 2967 4.8LNG Mt 19 88 31.3 $m 11949 60953 33.3Metallurgical coal Mt 142 214 7.1 $m 30700 34692 3.0

Thermal coal Mt 158 304 11.5 $m 17118 26770 7.8

Oil ML 19212 22404 3.2 $m 13205 15478 3.2Uranium t 6917 10140 7.4 $m 607 1050 10.1

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z BREE projection.Sources: BREE; Australian Bureau of Statistics.

Table 4: Medium term outlook for Australia’s resources and energy commodities

unit 2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

Commodity exports

Exchange rate US$/A$ 0.99 1.03 1.03 1.00 1.01 1.02 1.02 1.02

Value of exportsResources and energy A$m 17923

7192583

186452

205054

221100

240744

259030

276205

– real a A$m 188622

198167

186452

199275

208813

220958

231041

239417

Energy A$m 70143 77029 75314 81074 90870 114431

127871

142844

– real a A$m 73816 79263 75314 78790 85820 105027

114054

123818

Metals and other minerals A$m 10909

4115553

111138

123979

130230

126313

131159

133361

– real a A$m 114806

118904

111138

120485

122993

115931

116987

115598

Resources and energy sectorVolume of mine production b index 92.9 93.2 100.0 105.3 112.1 116.4 123.3 125.7

– energy index 88.8 88.3 100.0 103.4 108.8 114.5 127.0 133.5– metals and other minerals index 96.7 98.1 100.0 106.9 114.7 118.0 120.4 120.0

Gross value of mine production A$m 17206

7184879

178993

196851

212256

231114

248669

265157

– real a A$m 181077

190241

178993

191304

200461

212119

221799

229840

a In 2012–13 Australian dollars. b Base: 2012–13 = 100. f BREE forecast. z BREE projection.Sources: BREE; Australian Bureau of Statistics.

Major Australian commodity exports


17

Energy outlook

Oil

Nhu Che, Pam Pham and Alex Feng

Oil prices

The real WTI crude oil price averaged US$95 a barrel (in 2013 dollars) in 2012, or a decrease of 3 per cent relative to 2011. The Brent price fell slightly by 1 per cent in 2012, relative to 2011 to average US$112 a barrel. Lower prices are attributed to weak economic growth in major economies, a recession in the euro zone and lower economic growth in China.

The real WTI price is forecast to remain at an average of US$95 a barrel in 2013, while the real Brent price is forecast to increase slightly, averaging US$113 a barrel in the same year. Crude oil prices edged higher as 2012 drew to a close, supported by stronger than expected winter demand and geopolitical concerns (see Figure 1). By mid-January, prices were trading above December levels, with the Brent price at $110.75 per barrel and the WTI price around $95.15 per barrel.

Oil prices are projected to fall in 2014, as a result of an increased supply of liquid fuels by non-OPEC countries. By 2014, several US pipeline projects from the Mid-continent to the Gulf Coast refining centres are expected to come online that will reduce the cost of transporting crude oil to refiners. This, in turn, should result in a fall in the discount of WTI to Brent over the forecast period.

Over the long-term period to 2035, the International Energy Agency’s (IEA) latest New Policies Scenario projections have oil prices rising steadily to reach US$146 and US$215 a barrel by 2020 and 2035, respectively. Both WTI and Brent prices are projected to follow this trend. Over the medium term outlook period from 2015 to 2018, the WTI and Brent prices are projected to increase steadily by an average of 1 per cent per year. In 2018, the WTI price and Brent price are assumed to average US$89 and US$113 a barrel, respectively (see Figure 2).

Figure 1: Weekly WTI oil price


There are two significant risks to the outlook for oil prices. The first risk relates to potential escalations of tensions in the Middle East that could cause production disruptions, and put upward pressure on oil prices. The second risk is weaker than assumed world economic growth over the next 12 to 18 months, which may put downward pressure on oil prices.

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Figure 2: Annual WTI and Brent oil prices


World oil consumption

World oil consumption increased by 1 per cent in 2012, relative to 2011, to average 89.6 million barrels a day (see Figure 2). Increases in non-OECD consumption compensated for the declines in OECD consumption associated with lower economic growth and the debt crisis in Europe.

In 2013, economic activity is assumed to pick up and world oil consumption is forecast to increase by 3 per cent to average 92.1 million barrels a day. Robust growth in non-OECD consumption is expected to offset moderate falls in OECD consumption. By the end of 2013, oil consumption in non-OECD economies is forecast to surpass OECD oil consumption. Beyond 2013, world economic growth is assumed to strengthen further. Over the outlook period 2014–2018, world oil consumption is projected to grow at a rate of 1 per cent a year, to reach 95.3 million barrels a day in 2018.

Figure 3: Oil consumption in OECD and non-OECD economies


Oil consumption in Non-OECD economies

In 2012, consumption in non-OECD economies averaged 43.6 million barrels a day, up 3 per cent relative to 2011. In 2013, oil consumption in non-OECD economies is forecast to increase by 7 per cent, and to average 46.8 million barrels a day following an assumed improvement in economic growth. In the medium term, stronger assumed economic and population growth is projected to support additional oil demand in industrial production and transport. During 2014–2018, non-OECD oil consumption is projected to grow at a rate of 2 per cent a year, to average 51.7 million barrels a day in 2018. Most of the growth is projected to come from China that will contribute a third of the incremental consumption increase over the outlook period.

China’s oil consumption rose by 3 per cent in 2012, relative to 2011, to average 9.5 million barrels a day. The IEA reported that consumption of major oil products (except naphtha) increased in 2012 and that demand of motor gasoline and jet fuel kerosene increased substantially. In 2013, China’s oil consumption is forecast to increase at a similar rate and average 9.9 million barrels a day with strong demand for naphtha, gas/diesel oil and motor gasoline.

Despite being the world’s second largest oil consumer, China’s per capita consumption of oil is around half of the world average. Economic growth in China is assumed to be robust over the medium term which will increase per capita incomes

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and support increased fuel demand in transport activities and a growing petrochemical sector. Between 2014 and 2018, China’s oil consumption is projected to increase at an average annual rate of 3 per cent to total 11.5 million barrels a day in 2018.

Oil consumption in India averaged 3.7 million barrels a day in 2012, up 4 per cent from 2011. Consumption growth in recent years has been supported by economic and population growth. Beyond 2012, India’s oil consumption is projected to increase by 3 per cent a year to average 4.3 million barrels a day by 2018.

In 2012, oil consumption in the Middle East rose by 3 per cent, relative to 2011, to total 7.6 million barrels a day. The expansion of oil powered generation activity is likely to continue to support oil demand and the Middle East’s oil consumption is forecast to average 7.8 million barrels a day in 2013. Over the remainder of the outlook period, oil consumption in the Middle East is projected to grow at an average annual rate of 2 per cent per year to total 8.6 million barrels a day by 2018.

Oil consumption in OECD economies

Oil consumption in OECD economies averaged 46 million barrels a day in 2012, down by 1 per cent relative to 2011. Increased demand in the OECD Pacific, particularly Japan, offset lower consumption in the US and Europe. In the short to medium term, oil consumption is projected to be supported by continued oil-fired electricity generation demand in Japan as a result of the temporary shutdown of many of its nuclear power plants. Over the outlook period 2013–2018, OECD oil consumption is projected to decrease by 1 per cent a year to total 43.7 million barrels a day in 2018.

Oil consumption in OECD-Europe has declined steadily since 2006, due to weak economic growth and on-going efficiency gains in the transport sector and the declining use of oil in electricity generation and heating. The declining demand trend is projected to continue over the outlook period. Short term falls in consumption are expected to be magnified by weak economic growth. In 2012, OECD-European oil consumption averaged 13.8 million barrels a day, down 4 per cent relative to 2011. In 2013, OECD-European oil consumption is forecast to contract further to total 13.6 million barrels a day. Between 2014 and 2018, oil consumption in OECD-Europe is projected to decrease at an average annual rate of 1 per cent, totalling 12.9 million barrels a day by 2018.

Oil consumption in North America averaged 23.8 million barrels a day in 2012, down by 2 per cent from 2011. Lower oil consumption in the US, in particular, contributed to this decline. In 2013, oil consumption is projected to stay at a similar level, but over the remainder of the outlook period, oil consumption in North America is projected to fall by 1 per cent a year and to average 23 million barrels a day by 2018.

Since late 2005, oil demand in the US has been on a structural decline. In 2012, the US’ oil consumption averaged 18.7 million barrels a day, decreasing by 2 per cent relative to 2011. Oil consumption is forecast to increase slightly in 2013 and 2014 as the result of increases in distillate and liquefied petroleum gas consumption.

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Between 2015 and 2018, oil consumption in the US is projected to decrease marginally to average 18.6 million barrels a day in 2018.

Oil consumption in the Pacific region is projected to increase in the short term and decline over the medium term. Changes in oil consumption are expected as the result of changes in the energy mix in Japan, the largest oil consuming country in the Pacific region. In 2012 Japan’s oil consumption was 4.7 million barrels a day, which was an increase by 5 per cent from 2011. In 2013, a gradual recovery in the Japanese nuclear capacity is forecast to reduce oil demand by 4 per cent to average 4.5 million barrels a day. Over the period 2014–2018, Japan’s oil consumption is projected to decrease at an average annual rate of 2 per cent to total 4.1 million barrels a day by 2018. The factors influencing a decrease in demand in Japan include an improvement in fuel efficiency and the gradual replacement of high cost oil-fired electricity generation by natural gas.

World oil production

World oil production is estimated to have increased by 1 per cent, relative to 2011, to average 85.3 million barrels a day in 2012. Production from non-OPEC countries accounted for nearly 60 per cent of the total world oil production. In 2013, world oil production is forecast to average 86.1 million barrels a day, with non-OPEC countries’ production averaging 50.7 million barrels a day. Production from OPEC countries is forecast to average 35.4 million barrels a day in 2013, or an increase of 1 per cent relative to 2012.

Over the remainder of the outlook period from 2014 to 2018, world oil production is projected to increase at an average annual rate of 1 per cent to reach 90.1 million barrels a day in 2018. The growth in world oil production is supported by projected increases in production from both OPEC and non-OPEC countries during this period, particularly unconventional oil production. In 2018, OPEC production is projected to be around 36.4 million barrels a day, largely supported by capacity increases in Iraq and Libya. Non-OPEC production is projected to grow at an average rate of 1 per cent a year over the outlook period 2014–2018 to average 53.8 million barrels a day in 2018.

Figure 4: World oil supply in OPEC and non-OPEC economies


Oil production in non-OPEC economies

In 2012, non-OPEC production is estimated to have increased by 1 per cent, relative to 2011, averaging 50.1 million barrels a day. Strong growth in oil shale and oil sand developments in North America supported the production increase and offset output decline in the North Sea fields due to unplanned outages and delayed start-up of several oil fields.

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In 2013, non-OPEC’s oil production is forecast to grow at a similar rate to 2012 and total 50.7 million barrels a day. The increase is due to rising unconventional supplies, mainly from the US’ light tight oil, Canadian oil sands, natural gas liquids, and a surge in deepwater oil production in Brazil. The production gains from the US, Canada and Brazil are forecast to contribute over 60 per cent of the incremental increase in non-OPEC production between 2012 and 2013.

Over the outlook period 2014–2018, non-OPEC oil production is projected to grow at an average rate of 1 per cent per year to reach 53.8 million barrels a day in 2018. The US and Canada are expected to lead non-OPEC production growth in the medium term. From 2014 to 2018, North America’s oil production is projected to increase by 1.6 million barrels a day to total 20.8 million barrels a day in 2018.

Latin America is projected to be the fastest growing region in term of oil production over the outlook period. From 2013 to 2018, Latin America’s oil production is projected to increase at an average annual rate of 4 per cent to total 5.4 million barrels a day by 2018. Brazil oil production is projected to contribute most of the growth in the region.

Oil production in the US averaged 14.9 million barrels a day in 2012, increasing by 2 per cent relative to 2011. High oil prices and new technologies have made the extraction of oil and gas from shale rock commercially viable in recent years and contributed to the rise in production. US Oil production is forecast to continue to increase in 2013, by 2 per cent, relative to 2012, to total 15.1 million barrels a day.

Over the remainder of the outlook period, US oil production is projected to grow at an average rate of 2 per cent a year. By 2018, US oil production is projected to be around 16.6 million barrels a day, an increase of 1.7 million barrels a day from the 2012 production level. Higher production volumes are primarily the result of increased onshore oil production, predominantly from tight (very low permeability) formations. Over the longer term, the IEA projects that the US will surpass Saudi Arabia to become the world’s biggest oil producer by 2020.

Canada’s oil production has grown robustly in recent years. Production growth is supported by a rebound in oil sands production activity, increases in the levels of domestic and foreign investment, and the successful application of horizontal drilling and multi-stage hydraulic fracturing methods. In 2012, oil production in Canada was around 3.6 million barrels a day, with oil sands production accounting for just under half of this amount. In 2013, Canada’s oil production is set to rise further to total 3.7 million barrels a day as the result of production from Hibernia, Terra Nova, and White Rose fields. Towards 2018, Canada’s oil production is projected to increase at an average rate of 3 per cent a year to total 4.2 million barrels a day in 2018. The Hebron field, scheduled to begin production in 2017, will offset declining production from the Newfoundland and Labrador offshore fields.

Brazil’s oil production is forecast to increase by 7 per cent in 2013, relative to 2012, to reach 2.5 million barrels a day. Crude output growth is supported by the addition of the FPSO Cidade de Anchieta at the Parque das Baleias group of fields and the

22

start of production from Sapinhoa and Roncador’s P-55 platform on the assumption that the Frade field will not restart until late 2013. Most of the growth in Brazil’s oil production is driven by the development of deepwater discoveries in the Campos and Santos basins, located off its southeast coast.

In the medium term, Brazil is set to become the fastest-growing oil producer outside the Middle East. Over the outlook period 2014–2018, Brazil’s oil production is projected to grow at an average annual rate of 7 per cent, reaching 3.6 million barrels a day in 2018. Production increases will be underpinned by the installation of additional production systems in several offshore oil fields including Baleia Azul, Guara North, Cernambi, Lula Central, Lula High and Maromba.

After reaching a record level of production in 2011, Russia’s oil production fell by 1 per cent to average 10.5 million barrels a day in 2012. In 2013, oil production is forecast to decline further to average 10.4 million barrels a day. In the medium term, production from maturing fields is projected to fall and will more than offset the increases in production from new fields. Although new fields are still being developed, the rate of growth is likely to be slow because these fields are often located in remote areas. Between 2014 and 2018, Russia’s oil production is projected to fall steadily at a rate of 1 per cent a year to average 10 million barrels a day in 2018.

Oil production in OPEC economies

OPEC oil production was 35.2 million barrels a day in 2012, an increase of 1 per cent, relative to 2011, supported by increased output from Saudi Arabia, Angola, Algeria and Libya. These increases offset the decline in Nigeria’s production because of severe flooding in November 2012 and a fall in Iran’s production. In 2013, OPEC oil production is forecast to grow at a similar rate to average 35.4 million barrels a day.

In the medium term, OPEC member countries continue to invest in refining, transportation, exploration and development activities intended to support oil market stability. Over the outlook period 2014–2018, OPEC production is projected to grow at an average rate of 1 per cent a year to reach 36.4 million barrels a day in 2018. Nearly half of the production increase is projected to come from natural gas liquids (NGLs), with crude oil and Venezuelan extra-heavy oil accounting for another 30 and 20 per cent, respectively, of the additional supply.

The projected growth in OPEC production will primarily come from the Middle East, predominantly Iraq. Iraq production is forecast to grow robustly by 8 per cent, relative to 2012, to total 3.1 million barrels a day in 2013. In the medium term, Iraq is likely to lead the growth in the Middle East production. Between 2014 and 2018, oil production from Iraq is projected to grow at an average annual rate of 8 per cent to be about 4.6 million barrels a day in 2018.

The Middle East is projected to dominate oil production of OPEC over the outlook period, accounting for about 75 per cent of total OPEC production by 2018. Outside

23

the Middle East, production is expected to rise in all member countries with the exception of Angola and Ecuador.

Oil production in Saudi Arabia is forecast to remain at an average of 11 million barrels a day in 2013, due to lower output from maturing fields. An increase in production in 2014 will be underpinned by the commencement of the Manifa offshore field ahead of schedule in 2014. In the medium term, production growth is assumed to be constrained by resource depletion. Over the remainder of the outlook period, production in Saudi Arabia is projected to decline steadily by 1 per cent a year. By 2018, oil production in Saudi Arabia is projected to average 10.7 million barrels a day.

In 2012, Iran’s oil production dropped well below its 2011 production level of 4.2 million barrels a day as a result of international oil sanctions imposed on Iran’s oil exports. Latest Iran’s oil supply is estimated to average 2.7 million barrels a day. In 2013, oil production from Iran is projected to fall further as a result of the US’s additional financial sanctions which began in February 2013. Between 2013 and 2018, Iran’s oil production is projected to decrease by 7 per cent a year to average 1.8 million barrels a day by 2018 on the assumption that sanctions imposed on Iran remain in place during the outlook period.

Libya’s oil production has rapidly recovered after the end of the 2011 civil war although production has still not yet reached the pre-war level. The IEA reported that Libyan oil supply in recent months averaged around 1.4 million barrels a day, and output is expected to reach about 1.6 million barrels a day in 2012, slightly below the 1.7 million barrels a day produced in 2010. During the outlook period 2013 to 2018, Libya’s oil production is projected to remain relatively flat at the 2012 production level. Oil production from the United Arab Emirates is expected to remain relatively stable at 3.3 million barrels a day over the outlook period as the government has delayed a plan to increase its crude oil capacity to 3.5 million barrels a day in 2014 to 2018.

Australian production and exports

Australia’s production of crude oil and condensate is estimated to have decreased by 9 per cent in 2011–12, relative to 2010–11, to total 22.4 gigalitres. Lower production is the result of planned maintenance on the North West Shelf, multiple unplanned shut-ins throughout the Carnarvon Basin during cyclone season, and declines in production from maturing fields. Output from the Kitan project in the Bonaparte Basin, which commenced in October 2011, partially offset this decline. In 2012–13, Australia’s crude oil and condensate production is forecast to increase by 3 per cent, relative to 2011–12, as a result of the commencement of crude production from the Montara-Skua project and condensate from the Kipper gas project.

Over the period from 2013–14 to 2015–16, Australian production of crude oil and condensate is projected to decrease at an average annual rate of 7 per cent. Declining production from maturing fields is projected to more than offset new production from several small fields including Coniston, Fletcher-Finucan, Turrum,

24

Crux and Balnaves in 2014–15 and 2015–16. In 2016–17 and 2017–18, Australia’s crude oil and condensate production is projected to rebound to 25.8 and 24.5 gigalitres, underpinned by condensate production associated with the Prelude and Ichthys projects. Beyond 2018, higher Australian oil production maybe supported by production from shale oil resources from the Arckaringa Basin surrounding Coober Pedy, although the start date for production and size of the resources remain unclear.

In 2011–12, Australia’s exports of crude oil and condensate decreased by 2 per cent to 19.2 gigalitres, relative to 2010–11 (see Figure 5). Despite the fall in the export volume, the value of Australia’s crude oil and condensate exports increased by 5 per cent to $13.6 billion (in 2012–13 dollars) in 2011–12. Australia’s exports of crude oil and condensate are forecast to increase by 13 per cent in 2012–13, with the export value increasing by 5 per cent, relative to 2010–11. From 2013–14 onwards to 2015–16, crude oil and condensate exports are projected to fall by 2 per cent per year to total 19.2 gigalitres in 2015–16. Australia’s crude oil and condensate exports are projected to rebound to 23.6 and 22.4 gigalitres in 2016–17 and 2017–18.

In value terms, Australia’s crude oil and condensate export earnings were about $13.6 billion (in 2012–13 prices) in 2011–12, an increase of 5 per cent relative to 2010–11. Between 2012–13 and 2015–16, the real value of Australian crude oil and condensate exports are projected to decline by an average of 6 per cent a year, as a result of projected lower export volumes (see Figure 5). Export earnings are projected to rebound to total $14.5 billion in 2016–17 and $13.4 billion in 2017–18 (in 2012–13 dollars), supported by exports from the Prelude and Ichthys projects.

Figure 5: Australian crude oil and condensate exports


Table 1: Oil outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldProduction b mbd 84.5 85.3 86.1 86.9 87.7 88.5 89.3 90.1Consumption mbd 88.8 89.6 92.1 92.8 93.4 94.0 94.7 95.3West Texas Intermediate crude oil price– nominal US$/bbl 95 93 95 85 86 87 88 89– real c US$/bbl 98 95 95 84 85 85 84 84Brent crude oil price– nominal US$/bbl 110 110 108 107 109 111 112 113– real c US$/bbl 114 112 108 106 107 107 107 106

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaCrude oil and condensate

25

Production b ML 24745 22408 i 22988 24031 22022 20940 25769 24481Export volume ML 19638 19212 18502 20075 18397 17493 21528 20451Export value– nominal A$m 12245 13205 12407 14091 12884 12159 15026 14274– real d A$m 12887 13588 12407 13694 12168 11160 13402 12373Imports ML 32225 29495 30683 27168 27584 27847 27138 27350LPGProduction e ML 3907 3652 3836 4117 3773 3588 4415 1104Export volume ML 2471 2115 2090 2280 2090 1987 2445 2445Export value– nominal A$m 1068 971 994 1171 1070 1010 1248 1248– real d A$m 1124 1000 994 1138 1010 927 1113 1082Petroleum productsRefinery production ML 38393 36081 35163 32966 33049 33131 33214 33214Exports g ML 760 1151 1104 1059 1082 1084 1087 1087Imports ML 18762 22194 24984 29569 30535 31999 33610 35346Consumption h ML 52095 53797 56333 57386 58712 60078 61478 62929

b One megalitre a year equals about 17.2 barrels a day. c In 2013 US dollars. d In 2012–13 Australian dollars. e Primary products sold as LPG. g Excludes LPG. h Domestic sales of marketable products. i Energy Quest. f BREE forecast. z BREE projection.Sources: BREE; ABARES; Australian Bureau of Statistics; International Energy Agency; Energy Information Administration (US Department of Energy); Energy Quest; Geoscience Australia.

26

Gas

Pam Pham, Nhu Che and Tom Willcock

World gas consumption

Global gas consumption has grown rapidly over the past two decades, increasing at an average annual rate of 2.6 per cent from 2500 billion cubic metres in 2000 to 3400 billion cubic metres in 2011. This growth is projected to continue at an average annual rate of around 1.8 per cent over the medium term, to reach a total level of annual consumption of 3800 billion cubic metres in 2018 (see Figure 1).

The attractiveness of gas fired electricity generation has been a key contributing factor to increased global demand. First, improved identification and extraction technologies have dramatically increased and reduced the cost of gas in key markets, such as the US. Second, the faster ramp-up speeds of gas powered plants allows them to respond quickly to peak demand, an increasingly desirable property for electricity grids. Third, gas is a relatively low emission technology relative to other fossil fuels.

Future gas demand is expected to be supported by growth in consumption in non-OECD economies that is projected to grow at 2.8 per cent annually to 2018. China underpins a large proportion of the rising demand with 12 per cent gas growth per annum. This will more than double China’s gas demand from 123 billion cubic metres in 2011 to 275 billion cubic metres in 2018. Gas consumption in India, Africa and the Middle East will grow substantially at about 3 per cent per annum. Demand growth from OECD nations is expected to develop more moderately, or around 0.7 per cent per year, over the same time period. Falling European demand, a result of strong competition from renewables and assumed weak economic growth, will be offset by increased American and OECD-Asian growth, primarily from electricity generation.

Figure 1: World gas consumption


Global LNG trade

World gas production is concentrated in the Former Soviet Union, North America and the Middle East. Gas consumption, however, occurs in many regions. Projected increases in global gas consumption, production in a few key locations and associated regional price disparities are projected to underpin an expansion of global gas trade.

The current global capacity for LNG trade is around 288 million tonnes per year. Qatar has the largest LNG export capacity of 77 million tonnes per year and accounts

27

for about 27 per cent of the global capacity, followed by Indonesia which has some 13 per cent of the global capacity.

Australia is currently ranked third in terms of LNG export capacity. Australia’s current export capacity of LNG is about 24 million tonnes per year, and represented 8 per cent of global LNG exports. Australian LNG is mainly delivered to Japan, South Korea, China, Chinese Taipei and India. These markets accounted for about 64 per cent of world LNG imports in 2011.

Investment in inter- and intra-regional transport capacity will facilitate trade and enable greater gas consumption, particularly in Asia. Greater transport capacity will take the form of additional pipelines and the construction of LNG liquefaction and regasification terminals.

In 2011, world LNG trade totalled 241 million tonnes, and represented an increase of about 10 per cent relative to 2010. The Asia-Pacific region, which accounted for about 64 per cent of total world LNG imports, largely contributed to this growth (see Figure 2). In 2011, LNG imports in the Asia-Pacific region increased by 17 per cent, relative to 2010, to total 168 million tonnes. The recent growth of LNG imports to the Asia-Pacific region has, in part, been driven by increased gas demand for power generation in Japan, the largest LNG importer in the world, following the closures of most of its major nuclear facilities after the March 2011 earthquakes. Rapid growth in gas consumption in China has, in part, been met by LNG imports which has also contributed to the growth in the Asia-Pacific region.

Figure 2: LNG imports in 2011, by region


LNG imports in the Asia-Pacific have grown rapidly at an average rate of 7 per cent per year over the period 2000-2011. In 2012, the Asia-Pacific’s LNG imports are estimated to have increased by 10 per cent, relative to 2011, and totalled around 185 million tonnes, with the largest increase being LNG imports into India and China (see Figure 3). Over the medium term, LNG trade is expected to comprise an increasing proportion of the global gas trade, as it can be transported over longer distances and allows for a greater diversification of supply compared with gas transported through pipelines.

Overall, LNG imports into the Asia-Pacific are forecast to increase by 9 per cent in 2013 and to total 200 million tonnes, underpinned by demand for gas-fired electricity generation and higher industrial and residential consumption in existing and emerging LNG importing economies. Over the medium term, gas is expected to play a greater role in the power generation, as well as the residential and industrial sectors, and to eventually replace high cost fired-oil electricity generation. Between 2014 and 2018, the growth of LNG imports in the Asia-Pacific are projected to slow but still grow at a robust average rate of 7 per cent per year to reach 272 million tonnes in 2018.

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Figure 3: LNG imports into the Asia-Pacific


Japan is currently the largest LNG importer in the world. In the absence of domestic gas production and international pipelines, Japan is completely reliant on LNG imports to meet domestic consumption requirements. In 2011, Japan remained the largest LNG importer in the world, with a volume of LNG imports of around 86 million tonnes. In 2012 Japan’s imports of LNG are estimated to be about 87 million tonnes, an increase of 2 per cent relative to 2011.

Robust growth in LNG imports has followed the closure of most of Japan’s nuclear reactors caused by the March 2011 earthquakes and tsunami (as gas is a substitute for power generation). Although two reactors in Fukui Prefecture were restarted in 2012, 48 of Japan’s nuclear reactors still remain switched off, subject to safety testing. Until the safe start up of its nuclear plants, higher consumption of LNG growth is anticipated to continue. Over the outlook period 2013-18, Japan’s LNG imports are projected to increase at an average rate of 8 per cent per year to total 122 million tonnes by 2018.

The Republic of Korea is the second largest LNG importer in the world and, like Japan, its gas consists entirely of LNG imports. In 2012, its LNG imports are reported to be around 36 million tonnes, down by 1 per cent from 2011. The Republic of Korea’s LNG imports are forecast to increase by 6 per cent in 2013 to reach 38 million tonnes. The growth is underpinned by a rise in gas use for electricity generation and growing consumption of residential and commercial gas. Gas is also expected to continue to play a critical role in peak load electricity generation. Between 2014 and 2018, Korea’s LNG imports are projected to increase by an average of 5 per cent annually and to total 49 million tonnes in 2018.

China only started importing LNG in the past decade, but its LNG imports have grown rapidly. In 2011, China was the world’s fifth largest LNG importer, by volume. China’s LNG imports are reported to have increased by 30 per cent between 2011 and 2012, reaching 29 million tonnes in 2012. The growth in China’s LNG imports is expected to moderate as a result of the natural gas pipeline linking Myanmar with China in 2013. The pipeline runs from Kyaukpyu in Myanmar to Yunnan province in China with a capacity of 12 billion cubic metres per year. Despite this, China’s LNG imports are set to continue rising in 2013, by a robust 10 per cent, to reach 32 million tonnes.

The Chinese government is focused on developing domestic its gas supply to meet rising demand for gas consumption in the industrial, residential, and power, gas and water sectors. A large proportion of this demand is likely to be met by increasing imports through an extensive network of national and regional gas pipelines, with the total capacity of the main pipeline network exceeding 100 billion cubic metres per year. Over the remainder of the outlook period (2014 to 2018), China’s LNG imports are projected to grow at an average annual rate of 6 per cent to total 46 million tonnes in 2018.

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India’s LNG imports have increased at an average rate of 8 per cent per year over the period 2006-2011, underpinned by rising gas consumption in the electricity, industrial and residential sectors. In 2012, India’s LNG imports were estimated to be about 19 million tonnes. Rising demand for gas use will need to be met by both increased domestic production and imports. While India is expanding pipeline capacity over the medium term, LNG imports are forecast to supplement supply in the short term. In 2013, India is projected to add an additional 7.5 million tonnes to the total volume of LNG imports. Over the outlook period (2014-18), India’s LNG imports are projected to increase at an average rate of 4 per cent per year to reach 31 million tonnes in 2018.

Chinese Taipei’s LNG imports are reported to be around 13 million tonnes in 2012, up by 7 per cent from about 12 million tonnes in 2011. Demand for LNG in Chinese Taipei is projected to increase over the medium term. Increasing gas-fired electricity generation capacity is assumed to meet most of the expected increase in electricity demand. Uncertainty in the nuclear sector, where the 2.7 GW Lungmen plant has experienced a number of delays and public opposition, will likely support gas imports in the short to medium term.

From 2013, Chinese Taipei will be entitled, under contract, to an additional 1.5 million tonnes of LNG a year from Qatar. Total imports into Chinese Taipei in 2013 are projected to increase by 12 per cent, totalling 14 million tonnes. Between 2014 and 2018, additional demand for gas will be supported by increased electricity generation demand. Over the outlook, LNG imports into Chinese Taipei are projected to increase by 4 per cent a year to reach 16 million tonnes in 2018.

Imports into the Asia-Pacific region are expected to be further supported by growing demand from Asian economies, particularly LNG projects in Malaysia, Singapore, the Philippines and Indonesia. These projects are expected to add an additional 8 million tonnes per year into the Asia-Pacific region LNG import capacity from 2015.

World gas and LNG production

Global gas supply typically correlates closely to global demand with some fluctuations due to a change in stocks. The global gas supply increased from 2500 billion cubic metres in 2000 to 3400 billion cubic metres in 2011. Much of this growth has come from the Middle East, the Former Soviet Union, China and the United States. According to the International Energy Agency (IEA) the bulk of future growth in gas supply will come from these areas as well as Australia and Africa. Global gas supply is forecast to be 3800 billion cubic metres in 2018. The largest two producers in 2018, as in 2012, will be the United States and Russia with production of 728 and 686 billion cubic metres, respectively. Countries with the highest growth rates, in terms of production from 2012 to 2018, include Australia, Brazil, China, Iraq, Nigeria, Saudi Arabia, Turkmenistan and Qatar.

Global LNG supply is, in part, determined by the cost of liquefying and transporting natural gas. Australia exports more than half of its extracted gas due to relatively low domestic demand and the higher prices available overseas. Countries with larger

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domestic gas demand, the US for example, have not been an active participant in the LNG market. Other large suppliers with extensive land borders, such as the Russian Federation, have focused their exports via pipelines to consumers and given less emphasis to the LNG trade.

Australia is the most important country globally in terms of LNG capacity under construction with around 60 million tonnes of liquefaction capacity to come online by 2017. Other countries with LNG liquefaction projects under construction in 2013 include Algeria, Angola, Papua New Guinea and Indonesia. Over the longer term Australia, Russian Federation, Nigeria, Canada and the US all have a significant number of large LNG projects at the planning stage.

Gas supply growth from North America will have a profound effect on global LNG flows. Traditionally a gas importer, the US is currently the world’s largest consumer of gas. However, a trend of decreasing gas imports over the past decade has recently changed because a large number of unconventional gas resources have begun to be exploited. If this supply growth continues over the medium term it could turn North America into a sizeable LNG exporter. Projects once planned for regasification (LNG import) are currently being redesigned for liquefaction (LNG export). The US’ low gas price as defined by the Henry Hub benchmark, combined with rapid growth in demand from East Asia and relatively high prices are likely to result in considerable LNG exports from North America to the region. The knock-on effect of this additional supply will be increased competition for other Asia-Pacific producers, notably Australia, and lower landed gas prices in the leading LNG importing countries.

Figure 4: World gas production


Australian gas production

In 2011–12, Australian gas production was about 51 billion cubic metres, including production from the newly commenced Bass Gas (Yolla Mid Life Enhancement) in the Bass Strait. In 2013, a number of new projects and expansions are expected including Macedon (WA) and North Rankin (WA). In 2012–13, Australia’s gas production is forecast to increase by 20 per cent to 61 billion cubic metres. Increases in production are expected to be underpinned by the commissioning of a number of new fields. In 2014, the major projects expected to commence are the Surat Gas Project and Queensland Curtis LNG in Queensland. These projects are expected to underpin an additional 17 per cent increase in Australian gas production in 2013–14 to total 71 billion cubic metres.

Over the remainder of the outlook period (2014–15 to 2017–18), Australia’s gas production is projected to increase at an average annual rate of 11 per cent and to reach 135 billion cubic metres by 2017–18. Increased gas production is projected to be facilitated by new LNG capacity as well as demand for gas from the electricity generation, industrial and residential sectors. Between 2015 and 2018, a number of

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major projects will commence and will contribute significantly to Australian gas production and exports (see Table 2).

A substantial portion of Australia’s investment pipeline is comprised of LNG projects at both the Feasibility and Committed Stages. Development costs for new LNG projects in Australia have increased substantially.

Australian LNG exports

Australia’s LNG exports are estimated to be about 19 million tonnes in 2011–12, or some 4 per cent lower than 2010–11. This decline is due to maintenance at the North West Shelf LNG plant in the second half of 2011 and at the Darwin LNG plant in the second quarter of 2012.

Australian exports of LNG are forecast to increase significantly by 26 per cent in 2012–13 to total 24 million tonnes. In 2013–14, Australian exports are forecast to increase by a further 4 per cent to total 25 million tonnes as the result of production at the Pluto facility being scaled up towards capacity.

Over the remainder of the outlook period (2014–15 to 2017–18), Australian exports of LNG are projected to increase at an average rate of 36 per cent a year to reach 88 million tonnes in 2017–18 (see Figure 4). Projected increases in export volumes are expected to be underpinned by the commissioning of several LNG projects that are currently under construction, as shown in Table 2.

Figure 5: Australia’s LNG exports


LNG prices under long-term contracts in the Asia-Pacific are generally linked to the price of oil. During the medium term outlook, higher forecast oil prices are expected to support higher LNG prices. Increasing LNG prices, combined with increasing export volumes, are forecast to underpin growth of Australian LNG export earnings significantly during the medium term outlook. In 2012–13, the value of Australian LNG exports is forecast to total $16.3 billion. Between 2013–14 and 2017–18, Australia’s export earnings are projected to increase by an average of 31 per cent a year to total $52.8 billion (in 2012–13 dollars) in 2017–18. Increases in export earnings are the results of projected significant increases in Australian export volumes and projected higher LNG prices over the outlook period from 2012–13 to 2017–18.

Table 1: Gas outlook

unit2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaProduction Gm3 53.1 50.5 60.8 71.3 96.2 115.2 124.5 134.5LNG export volume Mt 20.0 19.3 24.3 25.2 33.1 62.8 71.7 87.9

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LNG export value

– nominal A$m 10437 11949 16199 17944 23471 4359

2 49678 60953

– real b A$m 10984 12296 16199 17438 22167 4000

9 44310 52835

b In 2012–13 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABARES; Geoscience Australia.

Table 2: Committed Australian gas and LNG projects

Project State Location Type Estimated Start Up

Estimated New Capacity

Indicative Cost Estimate $m

Australia Pacific LNG Qld Gladstone new project 2016 9 Mt 23000Gladstone LNG Qld Gladstone new project 2015 7.8 Mt 18000

Gorgon LNG WA Barrow Island new project 2015 15 Mt 43000

Greater Western Flank - Phase 1 WA Carnarvon

Basin expansion 2016 n/a 2300

Ichthys LNG NT Darwin new project 2017 8.4 Mt 33000Julimar Development Project WA 180 km NW

of Dampier new project 2016 1.65 Mt 1200

Kipper Gas Project (stage 1) VIC

42 km offshore Gippsland

new project 2016 30 PJ pa 1700

Macedon WA 100 km W of Onslow new project 2013 75 PJ pa 1470

NWS North Rankin B WA 150 km NW of Dampier expansion 2013 967 PJ pa 5000

Prelude Floating LNG WA Browse Basin new project 2016 3.6 Mt 12600

Queensland Curtis LNG project Qld Gladstone new project 2014 8.5 Mt 19800

Spar WA 120 km N of Onslow new project 2013 18 PJ pa 117

Turrum VIC Bass Strait new project 2013 11 kbpd, 77 PJ pa 2600

Wheatstone LNG WA 145 km NW of Dampier new project 2016 8.9 Mt 29000

Source: BREE.

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Thermal coal

Tom Shael and John Barber

Prices

In 2012, increased competition in key Asia-Pacific markets from suppliers in the US and Colombia led to lower coal spot prices. The Newcastle thermal coal price (FOB) averaged US$94 a tonne, a 22 per cent decrease relative to 2011. Prices reached a low of US$78 a tonne in October, but recovered to around US$91 by December 2012 due to Chinese buyers increasing purchases of cheaper foreign coal. The 2012 Japanese Financial Year (JFY, April 2012 to March 2013) benchmark contract price settled at US$115 a tonne, 15 per cent lower than the previous JFY contract.

The JFY 2013 benchmark contract price is forecast to settle 14 per cent lower than the JFY 2012 benchmark at around US$99 a tonne. The decline is expected as a result of lower spot prices over the past 6 months and the expectation that spot prices will stay around current levels for the remainder of 2013. Thermal coal consumption demand is forecast to increase in 2013, but competition to supply seaborne trade markets is expected to limit the prospects of higher prices during the 2013.

In the medium term, thermal coal prices (in JFY 2013 dollars) are projected to increase slightly in the short term, before decreasing later in the outlook period when large additions to supply are projected to come online. Consumption demand in key markets is projected to grow substantially over the next five years, but strong competition among coal producers is expected to moderate any price growth. In JFY 2013 US dollars, thermal coal contract prices are projected to peak in JFY 2015 at US$102 a tonne, before decreasing to US$90 in JFY 2018.

Figure 1: JFY thermal coal prices


World thermal coal imports

World thermal coal trade is estimated to have increased by 11 per cent in 2012, relative to 2011, to total 958 million tonnes. Increased consumption demand in non-OECD economies, particularly China and India, was the primary driver of the increase in trade. In China, lower thermal coal prices in 2012 made imports more commercially viable than domestic production sourced from some inland areas of the country.

Over the outlook period both world thermal coal consumption and trade are projected to increase, underpinned by robust energy demand growth in emerging economies. The low-cost and reliability of coal-fired electricity generation, as well

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abundance of fuel, will continue to make it appealing to emerging economies looking for cost-effective ways to meet rapid increases in energy demand. The New Policies Scenario in the IEA World Energy Outlook 2012 projects world coal consumption will increase from 4963 million tonnes of coal equivalent in 2010 to around 5831 million tonnes of coal equivalent in 2020. The projected increase in energy consumption from coal is the largest of all fuel sources analysed in the New Policies Scenario, including gas.

Figure 2: Major thermal coal importers


China

In China, sustained growth in electricity demand, infrastructure constraints and the relatively low cost of overseas coal supported substantially higher demand for thermal coal imports in 2012. China’s thermal coal imports are estimated to have totalled 210 million tonnes in 2012. Thermal coal imports are forecast to increase in 2013, albeit at a lower rate compared with the growth in 2012, to total 228 million tonnes. The growth is forecast as a result of the continued availability of relatively cheap imported coal in the Asia-Pacific market.

In the medium term, growth in China’s coal consumption is projected to moderate. Climate change policies, such as the recently proposed carbon price, and energy targets are assessed as having more effect on coal consumption in the later years of the outlook period, but will not reduce China’s overall coal consumption from current levels. Coal is expected to continue to have a large, but declining, share of China’s energy mix in 2018, with the share of gas, nuclear and renewables growing over the period.

Energy conservation targets announced by the State Council in February 2013 are not expected to cause a decline in coal consumption. The targets, which are based on tonnes of coal equivalent, rather than tonnes of coal by weight, still allow for growth in both total primary energy and also electricity consumption. Energy targets in previous Five-Year Plans have been exceeded by considerable margins and BREE assesses that the most recently announced target would require a substantial, and highly unlikely, decrease in assumed economic growth.

China is expected to remain by far the world’s largest producer of coal over the outlook period, but to become more reliant on imports to meet its requirements. Rising domestic production costs associated with increased safety regulations, transport system development and increasing transport distances from new mines to customers are expected to make cheaper imports more appealing to China’s coal-fired power plants. After the estimated large surge in imports in 2012, growth in China’s thermal coal imports is projected to moderate to an average annual rate of 3 per cent over 2013 to 2018, and to total 257 million tonnes in 2018.

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India

In 2012, India’s thermal coal imports are estimated to have increased by 17 per cent, relative to 2011, to total 101 million tonnes. India’s thermal coal consumption is projected to increase substantially over the outlook period, underpinned by planned expansions to the country’s coal-fired electricity generation capacity. India currently has around 210 gigawatts of coal-fired electricity generating capacity which provides around 56 per cent of its electricity requirements. By 2018 this capacity is projected to increase 55 per cent to around 330 gigawatts to meet the increasing electricity demands of India’s growing middle class and manufacturing industries.

While India is the world’s third largest producer of coal, growth in domestic production over the outlook period is not projected to be sufficient to meet increasing consumption demand. Recently announced investment plans to unlock substantial coal resources in Odisha, Jharkhand, and Chhattisgarh are not expected to be developed by 2018 given the difficulty associated with acquiring land in India and the lengthy approval process for the development of new mines and infrastructure networks. Accordingly, imports of thermal coal in India are projected to grow at an average annual rate of 11 per cent and to total 185 million tonnes in 2018.

Japan

In 2012, Japan’s imports of thermal coal are estimated to have totalled 133 million tonnes, around 9 per cent higher than in 2011. Japan’s nuclear power industry remains mostly offline and gas and oil have been the primary substitutes for nuclear in the country’s energy mix. Infrastructure constraints for the importation of coal are expected to continue limiting the prospects for growth in Japan’s thermal coal consumption and imports. In 2013, imports of thermal coal are forecast to total around 130 million tonnes. Over the outlook period, thermal coal imports are projected to decline by less than 1 per cent a year and to total 127 million tonnes in 2018.

Republic of Korea

In 2012 the Republic of Korea’s thermal coal imports are estimated to have totalled 95 million tonnes, a slight decrease from 2011. In 2013, continued expansion of the country’s coal-fired electricity generation capacity is forecast to support thermal coal imports growing by 3 per cent to total 98 million tonnes. Over the medium term, the Republic of Korea’s coal-fired electricity generation capacity is expected to increase by a further 2000 megawatts. The new capacity is projected to support thermal coal imports increasing at an average annual growth rate of 4 per cent and to total 117 million tonnes in 2018.

European Union

Imports in to EU in 2012 are estimated to have increased by 5 per cent, relative to 2011, to total 173 million tonnes. The increase is a result of estimated higher imports into the UK, Italy and Spain, compared with 2011. Over the period 2013 to 2018,

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imports into the EU are projected to remain stable at around 166 million tonnes a year.

World thermal coal exports

Over the outlook period increased world demand for thermal coal is projected to be met by higher exports from countries that already export substantial quantities of thermal coal including Australia, Indonesia, Colombia and South Africa (see Figure 3). Competition between these exporters is expected to increase because all exporters have plans to expand mine and infrastructure capacities.

Australia

Thermal coal exports from Australia are estimated to have increased 16 per cent in 2012 to total 171 million tonnes. Japan remained the principal destination for Australia’s thermal coal exports and imported 75 million tonnes of Australian coal, 15 per cent higher than its 2011 imports. Exports to China increased by 73 per cent to total 34 million tonnes, and accounted for the largest share of additional export volumes. Exports to the Republic of Korea increased by 2 per cent, relative to 2011, to total 30 million tonnes.

In 2013, Australia’s thermal coal exports are forecast to increase by 11 per cent, relative to 2012, to total 189 million tonnes. The increase is forecast to be supported by the start-up of recently completed projects, such as Rio Tinto and Mitsubishi’s Hunter Valley Operations Expansion, stage two of Whitehaven Coal’s Narrabri Coal Project and BHP Billiton’s Mount Arthur project. China is forecast to be the main source of growth in export volumes, but Japan is still expected to remain the principal export market for Australian producers.

Figure 3: Major thermal coal exporters


A slowing in new coal mine investment that has occurred over the past 18 months is expected to slow the rate of growth in Australia’s thermal coal exports between 2013 and 2016. Although there remains a large number of planned coal mining projects in Australia, rising construction and operating costs have reduced the financial viability of many projects. Recently, many Australian coal producers have been targeting efficiency and cost cutting programs in response to lower received prices and deferred decisions on new mines and/or expansion programs.

Expected foreign direct investment in greenfield developments in Queensland’s Galilee Basin could lead to the opening of a series of new and very large mines later in the outlook period. Such projects could include GVK-Hancock’s Alpha mine (annual capacity of 30 million tonnes), Adani’s Carmichael mine (60 million tonnes) and Waratah Coal’s China First coal project (40 million tonnes).

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Over the outlook period, Australia’s thermal coal exports are projected to increase to 315 million tonnes by 2018, supported by robust growth in exports to both India and China. By 2018, both India and China are expected to overtake Japan as Australia’s leading thermal coal export markets.

Indonesia

Indonesia’s exports of thermal coal are estimated to have increased by 2 per cent in 2012, relative to 2011, to total 315 million tonnes. In 2013, Indonesia’s exports of thermal coal are forecast to increase by a further 6 per cent to total 335 million tonnes, supported by robust world import demand. Over the medium term, Indonesia’s domestic reservation policy to ensure coal supply to electricity generators, the lower quality of domestic coal compared with other world suppliers and higher transport costs from new mines that will be located further inland are expected to result in Indonesia’s exports growing at a slower rate than in previous years. Over the outlook period, Indonesia’s exports are projected to grow at an annual rate of around 2 per cent, and to total 361 million tonnes in 2018.

The US

Exports from the US in 2012 are estimated to have increased by 47 per cent, relative to 2011 and to total 50 million tonnes. The second consecutive year of a marked increase in exports is a result of much lower natural gas prices due to large increases in unconventional gas production. Low gas prices have led to a substitution away from coal in domestic electricity generation, with displaced coal production being exported. However, higher production costs and transportation issues make the large-scale exportation of thermal coal unsustainable beyond the short term. As a result, over the medium term exports from the US are projected to decline to total around 23 million tonnes in 2018, having peaked at 55 million tonnes in 2013.

Colombia

Colombia’s thermal coal exports are estimated to have not grown in 2012, staying around 76 million tonnes, due to labour disputes and lower demand in North America. In 2013, Colombia’s thermal coal exports are forecast to return to growth and to total around 79 million tonnes. However, recent strikes at the Cerrejón coal mine in north Colombia and a one month operating suspension at Drummond’s coal port near Santa Marta in February 2013 will limit growth.

In the medium term, Colombian exporters are assumed to begin exporting larger quantities to the Asia-Pacific market as a result of weak import demand in the EU and the US. Although transportation costs from Colombia to East Asia are relatively high, export growth will be supported by low operating costs and high quality coal (low sulphur content and high calorific value) as well as policies in some Asian countries that promote diverse import supply bases. Scheduled expansions to infrastructure and mines in Colombia will underpin thermal coal exports growing at an average annual rate of 7 per cent to total 112 million tonnes in 2018.

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South Africa

In 2012, exports from South Africa are estimated to have increased by 5 per cent, relative to 2011, to total 75 million tonnes. Exports in 2013 are forecast to increase by a further 4 per cent to total 78 million tonnes. Over the medium term, growth in export volumes is expected to be limited by a recently announced government policy that will aim to secure coal supply for stated-owned electricity generator, Eskom. As a result, exports are projected to increase at around 1 per cent a year between 2013 and 2018, to total 80 million tonnes in 2018.

Australia’s export volumes and values

Australia’s thermal coal export volumes are forecast to increase by 18 per cent in 2012–13, relative to 2011–12, to total 187 million tonnes. The value of exports in 2012–13 are forecast to increase by 3 per cent to total $17.6 billion, with the increase in volumes more than offsetting the lower Australian dollar thermal coal price.

Over the remainder of the outlook period, Australia’s thermal coal exports are projected to grow at an annual rate of around 11 per cent to total 304 million tonnes in 2017–18. Export earnings are projected to grow at around 5 per cent a year to total $23.2 billion dollars (in 2012–13 dollars).

Figure 4: Australia’s thermal coal exports


Table 1: Thermal coal outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldContract prices b– nominal US$/t 130 115 99 102 104 105 99 96– real c US$/t 134 117 99 101 102 101 94 90

Coal trade Mt 866 958 988 1014 1040 1068 1098 1125

ImportsAsia Mt 577 665 696 724 750 774 800 824China Mt 146 210 228 243 250 252 255 257Chinese Taipei Mt 63 63 62 60 59 59 58 57India Mt 86 101 113 124 137 153 169 185Japan Mt 122 133 130 129 129 128 128 127Korea, Rep. of Mt 97 95 98 102 106 110 113 117Malaysia Mt 21 21 22 22 23 24 26 27other Asia Mt 42 42 43 44 46 48 51 54Europe Mt 211 218 218 218 220 222 225 227European Union d Mt 165 173 167 166 166 166 166 166other Europe Mt 46 45 51 52 54 56 59 61

Exports

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Australia Mt 148 171 189 202 223 256 283 315China Mt 11 10 10 10 9 9 9 9Colombia Mt 75 76 79 87 98 107 110 112Indonesia Mt 309 315 335 345 352 356 359 361Russian Federation

Mt109 110 110 112 114 116 114 112

South Africa Mt 72 75 78 78 79 79 80 80United States Mt 34 50 55 51 47 45 31 23

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaProduction Mt 206.1 222.9 251.7 258.3 278.7 302.5 333.3 369.1

ExportsVolume Mt 143.3 158.4 186.7 193.3 213.6 237.2 268.0 303.8Value– nominal A$m 13956 17118 17615 17660 19934 22365 24876 26770– real e A$m 14686 17614 17615 17162 18826 20527 22188 23204

b Japanese Fiscal Year, starting April 1, fob Australia basis, BREE Australia–Japan average contract price assessment. For steaming coal with a calorific value of 6700 kcal/kg (gross air dried. c In JFY 2012 US dollars. d Regarded as 27 countries for all years. e In 2012–13 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABARES; International Energy Agency; Coal Services Pty Ltd; Queensland Department of Mines and Energy.

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Uranium

John Barber

Prices

The uranium spot price averaged around US$48 a pound for 2012, a decrease of 15 per cent from 2011. While the uranium spot price remained relatively stable for the first half of 2012, subdued demand associated with the continued shut-down of Japan’s nuclear power industry led to a price decline in the second half of the year. Prices fell from around US$52 a pound in the first quarter to around US$42 a pound in the last quarter of 2012.

In 2013, the average spot price of uranium is forecast to decline a further 10 per cent, relative to 2012, to around US$45 a pound. Delays in the start-up of new nuclear reactors since the 2011 Fukushima Daiichi reactor incident, the continued shut-down of Japanese nuclear reactors until at least the second half of 2013 and large inventories of uranium are expected to limit the prospects for spot price growth in the first half of 2013. In the second half of 2013 reactor start-ups in several countries, the re-start of some Japanese reactors and opportunistic buying ahead of the expected tightening of supply associated with the end of the current US-Russian Highly Enriched Uranium (HEU) deal are expected to support higher uranium spot prices.

The supply situation is projected to tighten substantially over the outlook period to 2018. The combination of an increase in consumption demand due to a substantial rise in the number of operating nuclear reactors, lower supplies from secondary sources and delays in the development of major uranium mining projects around the world, are expected to support uranium prices rising from their current levels. Over the outlook period, the uranium spot price is projected to increase at an average annual rate of around 6 per cent to US$70 a pound (in 2013 dollars) in 2018.

Figure 1: Quarterly uranium price


Consumption

World uranium consumption for civilian electricity generation purposes is estimated at 75 100 tonnes in 2012, a 1.8 per cent increase from 2011, but 6 per cent lower than 2010. The overall drop in consumption since 2010 is attributable to the shut-down of most of Japan’s nuclear power industry following the 2011 Fukushima incident and early closure of eight reactors in Germany. These have more than offset the additional uranium requirements associated with the 15 new and refurbished reactors that achieved first power over the same period.

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In 2013, world uranium consumption is forecast to increase by 9 per cent, relative to 2012, to total 82 100 tonnes. The re-commitment of several countries to expand their nuclear power generating capacities is expected to result in up to 13 new reactors either starting commercial operations or achieving first power in 2013. Some of these nuclear power plants had been delayed pending the outcome of Government energy policy reviews, but are now scheduled to start up in 2013. China accounts for most of this growth with 6 new nuclear reactors that have a combined capacity of around 7 200 megawatts-electric with a potential start-up in 2013.

Japan’s energy policy and regulations will be a key determinant of uranium demand in the short term. As at 1 January 2013, only 2 of Japan’s 50 nuclear power reactors were operating with the remainder shut down for safety inspections. Their immediate future will be determined by the set of safety regulations to be finalised by the newly established Nuclear Regulatory Authority (NRA). Based on the draft proposal produced by the NRA in January 2013 it is expected that only a small portion of Japan’s nuclear reactors may re-enter service in 2013.

The majority of Japan’s nuclear reactors are projected to re-start later in the outlook period following further construction works necessary for compliance with the mandated safety requirements. Key factors underpinning a restart of some reactors are the recent rises in Japan’s carbon emissions, limited availability of electricity to support economic growth and high LNG prices associated with the increase in the use of gas in Japan’s energy mix while its nuclear industry has been idled. Given the age of some reactors and the potential costs of complying with the new safety regulations, not all of Japan’s nuclear power generating capacity is likely to be re-started over the outlook period and may, instead, be de-commissioned.

The outlook period from 2013 to 2018 is projected to be a period of substantial expansion in nuclear power generating capacity, particularly in emerging economies. The low carbon emissions, reliability as a source of base-load power and comparatively cheap operating cost have made nuclear power an appealing source of power to countries with few energy resource endowments of their own, or with rapidly growing energy demand. Total world uranium consumption is projected to increase at an average annual rate of 5 per cent to total around 100 000 tonnes in 2018. Driving this increase in consumption will be 75 new reactors with a combined capacity of around 80 Gigawatts-electric (GWe) that are projected to start-up by the end of 2018.

Figure 2: Net additional nuclear power capacity by 2018


China will be the largest contributor to the ‘nuclear resurgence’ over the outlook period. There are currently 28 nuclear reactors under construction in China with plans for an additional 8 reactors that may start-up by 2018, based on current construction rates. China’s uranium consumption is projected to increase at an

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annual average rate of over 9 per cent over the outlook period, from around 7 700 tonnes of U3O8 in 2012 to around 13 500 tonnes of U3O8 in 2018.

Although robust growth in nuclear power is projected for China, the US will remain the largest producer of nuclear power in the medium term. The availability of cheap shale gas supplies is not expected to substantially displace nuclear energy in the US in the medium term due to the low operating cost of producing nuclear power and the high decommissioning costs associated with shutting down nuclear power plants. The number of reactors in the US is projected to increase over the outlook period with three reactors already under construction. Consumption of U3O8 is projected to increase at an average annual rate of 1.9 per cent to total around 26 000 tonnes in 2018. There are plans to construct additional reactors in the US; however, based on current planning and construction times these are more likely to start up after 2018.

Like China, India has energy policies that support substantial increases in nuclear power generating capacity to provide energy to its growing economy and population. Although most of this additional capacity is likely to start-up after the outlook period, six nuclear reactors are already under construction in India with an additional three being planned that could start operating by 2018. These will lead to India’s nuclear power capacity increasing from around 4 300 MWe in 2012 to over 12 000 MWe in 2018. Uranium consumption is projected to increase at an average annual rate of 19 per cent to support this capacity expansion, from 1 100 tonnes in 2012 to around 3 200 tonnes in 2018.

In Europe, nuclear power capacity is projected to grow over the outlook period to 2018 with increases in the Russian Federation and eastern European countries more than offsetting the planned reductions in Germany and Belgium. France is expected to remain the largest consumer of uranium in Europe, but with consumption remaining stable at around 11 000 tonnes. The Russian Federation will be the principal driver of growth in terms of European uranium consumption with up to nine additional operating reactors expected to start up by 2018. Uranium consumption in the Russian Federation is projected to increase at an annual average rate of 3 per cent from 2012 to total 7 800 tonnes in 2018.

Beyond 2018, the expansion of nuclear power is expected continue, potentially at an even greater rate. While the Fukushima Daiichi incident led a number of countries to review their energy policies, most have re-affirmed their commitment to increasing the role of nuclear power in their energy mix. In addition to the emerging economies driving the current expansion of nuclear power, several other nations appear likely to develop new nuclear power industries after 2020, particularly in the Middle East. The United Arab Emirates has already committed to building its first nuclear reactor and has advanced plans for further reactor approvals. The oil-rich nation of Saudi Arabia also has well-advanced plans to start its own nuclear power industry as a means of reducing its use of oil in its energy mix in the long term. These expansion plans indicate world uranium consumption will continue to grow in the long term.

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Production

In 2012, world uranium mine production is estimated to have increased despite weak world demand. Most of this growth is attributable to previously established mines, such as Paladin Energy’s Langer Heinrich mine in Namibia, ramping up towards full production or mines recovering from production disruptions. Total primary uranium production is estimated to have increased 6.5 per cent in 2012, relative to 2011, to total 67 000 tonnes.

Subdued world demand and high levels of existing inventories are expected to limit further production growth in 2013. Primary uranium production is forecast to increase by 0.8 per cent in 2013 to around 68 000 tonnes, underpinned by further production ramp-ups at existing mines in Kazakhstan, Niger and Namibia. Heavy storms in Kazakhstan’s Sozak region in February 2013 are not expected to have any notable effect on its uranium production. Partially offsetting the production increases in Kazakhstan, Niger and Namibia is forecast lower production in Australia associated with the cessation of ore production at pit 3 of ERA’s Ranger mine in December 2012.

In the medium term, world primary uranium production is projected to increase at an average annual rate of 5 per cent to total around 92 000 tonnes in 2018. Canada is the main contributor to this projected growth in production with the start-up of Cameco’s Cigar Lake mine underpinning a 6 300 tonne per year, or 60 per cent, increase in uranium output in 2018, relative to 2012.

Over the outlook period, Kazakhstan will remain the world’s largest supplier of uranium. Although no new mines in Kazakhstan are viewed as likely to start up before 2018, existing mines are expected to continue expanding production in this period. In 2018, Kazakhstan is projected to produce around 29 000 tonnes of U3O8, a 17 per cent increase relative to 2012.

Niger and Namibia are both projected to have substantial increases in their uranium production over the outlook period, underpinned by the assumed opening of the large Imouraren (Niger) and Husab (Namibia) mines after 2015. Uranium production in Namibia is projected to total around 8 800 tonnes in 2018, a 78 per cent increase relative to 2012. Similarly, production in Niger is projected to increase 60 per cent over the outlook period to total 8 100 tonnes. There are additional projects being developed in these regions, such as Bannerman Resources Etango project in Namibia, which may commence operations before 2018 and further increase production.

Box 1: Demand and supply balance

For uranium markets, 2011 was the year of unanticipated demand shocks in the form of energy policy changes in response to the Fukushima Daiichi reactor incident. Japan shut-down almost its entire nuclear power industry, Germany brought forward the closure of several nuclear reactors and a number of countries halted the development of their nuclear energy programs to review safety guidelines. In coming

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years the supply-side is expected to become the more central issue for the market and principal driver of price changes.

The first supply issue facing the uranium market is an expected, sharp drop in sources of secondary supplies at the end of 2013. The US-Russian HEU agreement, which removes highly-enriched uranium from Russian nuclear weapons and down-blends it to levels that are suitable for use in American nuclear power plants, is scheduled to expire at the end of 2013. So far there is little evidence to suggest the agreement will be renewed and, without it, the supply of around 9 000 tonnes of U3O8 equivalent will be removed from the market in 2014.

In the short-term, the drop in supply due to the end of the US-Russian HEU agreement can most likely be absorbed by the market as there are currently sufficient inventories to cover the supply dip in 2014. The more significant issue is that over the medium term many of the large uranium mining projects that were scheduled to respond to the growth in the number of nuclear reactors have been delayed.

The most significant of these was the cancellation of Areva’s $1 billion Trekkopje mine in Namibia. Despite being near completion, the mine, that was to provide around 3000 tonnes a year, was placed under care and maintenance in October 2012 in response to low market prices that had prevailed throughout the year. Areva’s Imouraren mine in Niger has also been delayed, but is still expected to commence initial production by 2015.

Project delays have not been isolated to those under construction in Africa and a series of uranium mining projects at less advanced stages of development in Australia have also been delayed. Cameco announced the Kintyre mine in Western Australia required a price of around $67 a pound to be feasible and has subsequently slowed the development of the mine. BHP Billiton’s decision to consider different ways to proceed with the Olympic Dam expansion project in South Australia indicates it is unlikely to increase production of uranium in the outlook period. BHP Billiton’s sale of its Yeelirrie project to Cameco is also likely to lead to a delayed start up for the mine.

The aggregate effect of project delays has been to remove around 10 000 tonnes of primary uranium production that was at one point scheduled to enter the market around 2015. Commensurate delays in developing nuclear power plants in the wake of energy policy reviews and re-starting Japan’s nuclear power industry are likely to limit the prospect of supply shortfalls in the near term. However, given uranium mine development lead times, particularly in Australia which has the world’s largest identified uranium reserves, the delays to major projects have increased the risk of future market imbalances and price spikes. This risk increases in the long-term as the current uranium price, which has been subdued in 2012, is not sufficient to support the development of the next wave of new projects that will be needed to supply the growing nuclear power industries of China and India after 2018.

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Australia

Production

In the past twelve months there have been major policy changes in Australia in relation to uranium production. In October 2012 the Queensland Government announced it would overturn a ban on uranium mining that had been in place since 1989. As uranium exploration was not included in the ban, there are several known sites in the Mt Isa region of Queensland, such as Paladin Energy’s Valhalla and Laramide Resources’ Westmoreland deposits, that have the potential to increase Australia’s production of uranium.

Based on current market conditions and the lead time to bring a uranium mine into operation in Australia it is unlikely that production from Queensland will start within the next 5 years. Similarly, the announced introduction of uranium exploration in New South Wales is not expected to result in uranium production before 2018. Western Australia is expected to the be the next state to commence uranium mining with Toro Energy’s Wiluna mine assumed to start initial production in late 2014.

Australia’s production of uranium in 2011–12 increased 8 per cent, relative to 2010–11, to total 7 657 tonnes. The increase in production is attributable to higher production at ERA’s Ranger mine in the Northern Territory which was affected by heavy rainfall in the first half of 2011. In 2012–13 Australia’s uranium production is forecast to decrease 15 per cent due to Ranger ceasing ore extraction activities in December 2012 and relying on previously mined ore and tailings. The recently approved Four Mile mine in South Australia is not expected to start initial production until 2013–14 and, like all uranium mines, will need some time to ramp up to full production.

Between 2011–12 and 2017–18 Australia’s uranium production is projected to increase at an average annual rate of 6 per cent to total 10 100 tonnes. Initial production at ERA’s Ranger 3 Deeps is expected to start in late 2015, although full production capacity is estimated to be lower than the Ranger 3 pit it is replacing. New projected production at the Honeymoon, Four Mile and Wiluna mines will be partially offset by the assumed closing of the Beverley mine in South Australia. The expansion of BHP Billiton’s Olympic Dam mine is not expected to occur in this outlook period and only one of Cameco’s Kintyre and Yeelirrie projects is assumed to start initial production late in the period.

Exports

Australia’s energy policy gives a clear indication that there are no plans for a domestic nuclear power industry. Therefore, all uranium produced in Australia is still assumed to be provided to export markets throughout the outlook period.

Supported by higher production, Australia’s uranium export volume is forecast to increase to around 8 500 tonnes in 2012–13, an increase of 22 per cent compared to 2011–12. The value of uranium exports from Australia is forecast to increase by 13

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per cent in 2012–13 to total $686 million with the lower price of uranium limiting growth.

Over the outlook period, Australia’s uranium export volumes are projected to increase at an average annual rate of 6.5 per cent to total around 10 100 tonnes in 2017–18. This increase in export volume and projected increases in uranium prices underpin higher export values which are projected to increase to around $910 million (in 2012–13 prices) in 2017–18.

Figure 3: Australia’s uranium export volumes and values


Table 1: Uranium outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldProduction kt 63.3 67.2 67.9 72.1 78.2 83.5 87.9 92.1 Africa b kt 10.4 11.9 12.7 13.2 13.7 14.8 16.6 19.8 Canada kt 10.8 10.2 10.4 11.9 14.3 16.6 16.7 16.5 Kazakhstan kt 22.9 24.6 25.1 26.0 27.3 28.6 28.8 28.8 Russian Federation kt 3.5 3.3 3.5 3.9 4.2 4.4 4.9 5.3Consumption kt 73.8 75.1 82.1 87.2 89.0 89.9 94.9 100.6 China kt 4.8 7.7 7.5 11.4 10.7 9.7 12.5 13.5 European Union c kt 23.4 22.6 23.4 22.9 22.6 25.0 23.3 23.9 Japan kt 3.3 0.4 3.9 8.4 10.3 9.0 8.3 7.8 Russian Federation kt 5.8 6.5 6.7 6.3 5.8 6.9 7.7 7.8 United States kt 21.7 23.3 23.1 21.8 22.6 22.0 23.7 26.1Spot price US$/lb 56.8 48.5 44.6 54.8 64.0 60.5 66.3 73.8– real d US$/lb 58.5 49.4 44.6 54.2 62.7 58.5 63.2 69.4

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaProduction t 7069 7657 8177 6875 7490 8390 9240 10140Export volume t 6950 6917 8492 6975 7490 8390 9240 10140– nominal value A$m 610 607 686 611 714 837 901 1050– real value e A$m 642 625 686 594 675 768 804 910Average price A$/kg 87.7 87.8 80.8 87.6 95.4 99.7 97.5 103.6– real e A$/kg 92.3 90.3 80.8 85.2 90.1 91.5 87.0 89.8

b Includes Niger, Namibia, South Africa, Malawi and Zambia. c Regarded as 27 countries for all years. d In 2013 US dollars. e In 2012–13 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABARES; Australian Bureau of Statistics; Department of Resources, Energy and Tourism; Ux Consulting.

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Resources outlook

Steel and steel-making raw materials

Tom Shael

World steel consumption

World steel consumption in 2012 is estimated to have increased by 3 per cent, relative to 2011, to around 1.5 billion tonnes. Lower rates of growth are estimated for most major steel consuming economies which can be attributed to lower investment growth in infrastructure and fixed assets as well as uncertainty surrounding economic prospects for key OECD economies.

In 2013, world steel consumption is forecast to increase by 3 per cent, relative to 2012, to total 1.6 billion tonnes. Forecast growth will be supported by increased infrastructure construction activity in emerging economies, although potentially lower rates of investment in residential construction in China represent a downside risk to this growth.

Over the period 2014 to 2018, world steel consumption is projected to increase at an average annual rate of 3 per cent to total 1.8 billion tonnes in 2018 (see Table 1). Growth in steel consumption in OECD economies is projected to be subdued due to the effects of austerity programs on steel-intensive capital formation and assumed lower economic activity. By contrast, growth in non-OECD steel consumption is projected to be robust, supported by sustained economic growth, higher rates of fixed capital formation and on-going urbanisation.

Table 1: World steel consumption and production (Mt)2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

Crude steel consumptionEuropean Union 27 169 167 168 170 172 175 177 180US 96 98 100 103 105 107 109 111Brazil 28 28 30 31 32 33 34 35Russian Federation 47 49 50 52 53 54 55 56China 650 669 697 725 751 776 800 822Japan 70 73 75 77 78 80 81 83Korea, Rep. of 59 59 63 65 67 69 72 74Chinese Taipei 22 22 23 24 25 25 26 27India 74 78 84 89 95 101 106 112World steel consumption 1485 1527 1584 1641 1688 1737 1792 1846

Crude steel productionEuropean Union 27 176 167 167 169 172 175 179 182US 86 89 90 92 94 96 98 100Brazil 35 35 37 39 41 42 44 45Russian Federation 69 71 73 76 79 83 86 89

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China 683 709 737 765 792 816 840 862Japan 108 107 109 110 112 113 114 116Korea, Rep. of 68 69 72 74 77 80 83 86Chinese Taipei 23 21 21 22 22 23 23 24India 72 77 82 88 92 98 104 111

World steel production 1510 1533 1583 1636 1684 1738 1793 1845

Sources: BREE; World Steel Association.

China was the world’s largest consumer of steel in 2012, accounting for around 44 per cent of total global consumption. However, the rate of growth in steel consumption was slower than in 2011 due to the tailing off of Government spending programs initiated in response the global financial crisis. In 2013, China’s steel consumption is forecast to increase 4 per cent, relative to 2012, to total 697 million tonnes. The announced approval of infrastructure investment packages in late 2012, particularly expansions to rail networks, as well as continued growth in commercial and residential construction are expected to support higher steel consumption.

Over the remainder of the outlook period (2014 to 2018), China’s steel consumption is projected to continue increasing, underpinned by the construction of housing and infrastructure to support China’s increasing urban population. Although steel demand in China is projected to increase over the outlook period, the rate of growth is expected to be lower. The lower growth rate reflects an expected slowing in housing and property investment brought about by government policies designed to reduce over-investment in the property sector and a gradual shift towards a more consumption, rather than investment, driven economy in China. Between 2014 and 2018 China’s steel consumption growth is projected to average 3 per cent a year to total 822 million tonnes in 2018. If the Chinese economy were to undergo a structural shift and reduce its rate of fixed asset investment sooner, China’s steel consumption (and production) could be substantially lower than its projected level by the end of the outlook period.

In 2013, India’s steel consumption is forecast to increase 7 per cent, compared to 2012, to total 84 million tonnes. Higher consumption is expected as a result of assumed robust economic growth associated with government spending on infrastructure and higher consumption of consumer durables. Over the period 2014 to 2018, consumption growth is projected to increase at an average annual rate of 6 per cent a year to total 112 million tonnes in 2018. Increases in India’s steel consumption are expected to be supported by government efforts to increase the coverage and quality of road networks (including bridges), rail systems, electricity generation and other infrastructure as well as a gradual increase in consumption of consumer durables in response to rising incomes.

In Brazil, steel consumption is projected to grow strongly over the outlook period, increasing at a projected average rate of 3 per cent a year to total 35 million tonnes in 2018. The construction of infrastructure that will be required to host the 2014 FIFA World Cup and then the 2016 Olympic Games is expected to provide strong support for steel consumption growth.

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Over the outlook period, steel consumption growth in OECD economies is projected to be slower than non-OECD economies. Steel consumption in the US and the EU is projected to increase at an average annual rate of 2 per cent and 1 per cent, respectively, to 2018. In Japan, steel consumption is forecast to increase by 2 per cent a year over the outlook period. In Japan, higher steel consumption will be supported by rebuilding activity across its earthquake and tsunami affected regions in the first half of the outlook period. Japan’s steel consumption growth is projected to moderate in the second half of the outlook period as reconstruction comes to an end. In 2018, Japan’s consumption is projected to total 83 million tonnes, 10 million tonnes higher than 2012. Steel consumption in the US and the EU is projected to total 111 and 180 million tonnes, respectively. Neither is expected to have rates of fixed asset investment that would support substantially higher growth in steel consumption.

World steel production

World steel production in 2012 is estimated to have been 2 per cent higher than in 2011, at 1.5 billion tonnes. The slower rate of growth compared with 2011 is attributed to uncertainty about world economic growth and the future prospects for world steel industries. In 2013, world steel production is forecast to increase by 3 per cent, relative to 2012, to total 1.6 billion tonnes. Over the outlook period, global steel production is projected to grow at an average rate of 3 per cent a year, to reach 1.8 billion tonnes in 2018. The projected growth reflects primarily strong growth in production in emerging economies, particularly China and India.

Figure 1: Quarterly steel production


In 2013, China’s steel production is forecast to increase by 4 per cent, relative to 2012, to total 737 million tonnes. After growing at an annual average rate of 15 per cent from 2002 to 2012, the rate of growth in China’s steel production is projected to moderate over the outlook period. Over the period 2014 to 2018, China’s steel production is projected to grow at 3 per cent a year to total 862 million tonnes in 2018. The moderation in production growth is expected as a result of government measures to curb production overcapacity issues (particularly in some low-value steel products) and to increase the overall efficiency of the domestic steel industry.

Over the outlook period, India’s steel production is projected to increase at an average annual rate of 6 per cent, to reach 112 million tonnes in 2018. The increase in steel production is expected to be bolstered by demand from both the public and private sectors. The government-owned corporations Steel Authority of India Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) have expansion plans to increase combined production capacity by around 15 million tonnes across a number of states by 2015. Private steel producers also have plans to increase their steel production, including Tata Steel, Essar Steel and Jindal Steel Power Limited (JSPL).

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In OECD economies, only a moderate increase in steel production is projected to the end of 2018. Steel production in both the US and Japan is projected to grow at an average rate of 2 per cent a year, to reach 100 million tonnes and 116 million tonnes, respectively, in 2018. Capacity utilisation rates at steel mills in the EU are expected to begin increasing in 2014, in line with assumed stronger economic growth in key producing regions following weak economic activity in 2011, 2012 and 2013. Steel production in the EU is expected to increase at an average annual rate of 1 per cent between 2013 and 2018 and to total 182 million tonnes in 2018.

Iron ore prices

In 2012, iron ore contract prices averaged US$129 a tonne, a decrease of 16 per cent from the historic record of US$153 a tonne for 2011. Spot prices for cargoes of 62 per cent iron content basis, FOB Australia averaged US$122 a tonne in 2012, with higher prices in the first half of 2012 being counterbalanced by a substantial downturn in the September quarter. The sharp drop in spot prices, to a low of around US$81 a tonne FOB Australia, was a result of de-stocking activities by traders in China and negative sentiment surrounding the Chinese steel industry, particularly production overcapacity. Iron ore price volatility has been increasing over the past four years which has coincided with the increased use of shorter term contracts and spot trading. Price swings of 30 per cent, or more, in response to stock cycles and sentiment are becoming regular features of the market.

The sharp, yet protracted, recovery in iron ore spot prices in the December 2012 quarter resulted in spot prices finishing 2012 at over US$130 a tonne. The recovery has continued strongly into the March quarter 2013, reaching a high of US$152 a tonne (FOB) in mid-February and are estimated to average around US$145 a tonne for the March quarter. The recovery in prices up to February 2013 can be attributed to improved sentiment surrounding China’s outlook for steel demand combined with re-stocking of ore at Chinese ports and steel mills. Spot prices, however, have declined in March 2013 due to surging inventories of steel products. For 2013 as a whole, contract and spot prices are forecast to average US$119 a tonne (see Figure 2).

Over the remainder of the outlook period, contract and spot prices are both projected to decline year-on-year and to average around US$90 a tonne in 2018 (in 2013 US dollars). The decrease in prices is expected in response to moderating demand, particularly in China, and substantial supply increases from mining projects that are already under construction and scheduled to commence operation over the medium term.

Figure 2: Iron ore contract prices, FOB Australia


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World trade in iron ore

In 2013, the world iron ore trade is forecast to increase by 5 per cent, compared with 2012, to total 1.2 billion tonnes. Over the medium term, the world iron ore trade is projected to increase at an annual average rate of 5 per cent to reach 1.5 billion tonnes in 2018 (see Table 2). China’s imports are projected to grow strongly, while the majority of additional iron ore exports are expected to come from Australia and Brazil.

Table 2: World iron ore trade (Mt)2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

Iron ore importsEuropean Union 27 135 128 130 131 133 135 138 140Japan 128 131 132 134 136 137 139 140China 687 745 773 805 832 873 916 966Korea, Rep. of 65 66 68 70 73 76 79 82Chinese Taipei 20 18 20 19 20 21 21 22

Iron ore exportsAustralia 438 488 554 662 715 760 812 831Brazil 331 327 333 366 391 395 405 411India (net exports) 48 23 2 –13 –17 –18 –13 –4Canada 32 34 34 35 35 35 35 35South Africa 42 47 49 51 54 56 58 60Guinea & Mauritania 11 12 12 13 14 16 17 24

World trade 1083 1123 1176 1267 1326 1379 1434 1475

Sources: BREE; UNCTAD.

Iron ore imports

In 2013, China’s imports of iron ore are forecast to increase 4 per cent, relative to 2012, to total 773 million tonnes. The key factor determining Chinese imports is the cost and quality of domestic production. China’s iron ore production tends to be of a low quality relative to imports and there are a number of mines with high marginal costs of production. As a result, the proportion of Chinese consumption supplied by imports can fluctuate substantially depending on China’s domestic swing production, which responds to prevailing iron ore import prices.

Over the medium term, Chinese steel producers are expected to increase their reliance on imported ore due to declining ore grades of domestic ores, an increasing concentration of steel mills on the eastern coast with easy access to ports and efforts being made to increase the average grade of steel produced in China (which requires higher grade ores, such as those from Australia and Brazil). Although projected to increase its reliance on imports, China aims to have around 40 per cent of its imports supplied by Chinese owned foreign projects by 2015. From 2014 to 2018, China’s imports are projected to increase at an annual average rate of 5 per cent to reach 966 million tonnes in 2018, accounting for around 65 per cent of global imports.

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Imports into the Republic of Korea are projected to increase at around 4 per cent a year over the outlook period, supported by robust steel demand by car and ship manufacturers. Imports into the EU and Japan are expected to continue to increase in line with modest growth in steel production. Iron ore imports for both the EU and Japan are projected to increase at an annual average rate of around 1 per cent over 2013 to 2018 to total 140 million tonnes in 2018.

Iron ore exports

In 2013, Australian iron ore exports are forecast to increase by 12 per cent, compared with 2012, to total 554 million tonnes. The increase will be supported by forecast higher production at a number of mines including those operated by Rio Tinto and BHP Billiton as well as the ramp up of production at Fortescue’s Chichester Hub and Solomon Hub expansion projects. As a result of robust investment at the start of this decade, expansions and new mines in existing regions in Australia are expected to support strong growth in iron ore exports from Australia in the first half of the outlook period. Australia’s iron ore exports are projected to increase at an average annual rate of 8 per cent a year over the period 2014 to 2018 to total 831 million tonnes in 2018 (see Figure 3).

Brazil is the world’s second largest exporter of iron ore and is projected maintain this position over the medium term. In 2013, Brazil’s iron ore exports are forecast to increase by 2 per cent, relative to 2012, to total 333 million tonnes. Over the remainder of the outlook period, Brazil’s exports are projected to increase at an annual average rate of 4 per cent and to reach 411 million tonnes in 2018. A substantial proportion of this growth in exports is expected to be sourced from expansions located in the Carajas and South-East iron ore systems that are scheduled for completion over the next five years. The largest of these projects is the 90 million tonnes annual capacity Serra Sul project that is scheduled to commence operation towards the end of the outlook period; however, a mining project of this size and technical complexity has substantial schedule risks.

Figure 3: Major iron ore exporters


India’s exports of iron ore are projected to decrease over the outlook period due to government policies. In the short term, India’s iron ore exports are forecast to decrease substantially due to Government mandated mining bans in the key iron ore mining states of Odisha and Goa. The ban on mining, as recommended by the Shah Commission, is expected to remain in place in the short term, as measures are taken to eliminate illegal mining of iron and manganese ores. The ban is forecast to result in a substantial decrease in India’s domestic iron ore production, which, in turn, will cause a reduction in exports rather than domestic consumption. Another factor affecting exports in the short term is the continuation of the 30 per cent excise tax on iron ore exports designed to discourage exports.

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Indian iron ore exports over the remainder of the outlook period will be negatively affected by Indian Government policies that aim to ensure sufficient iron ore supply for domestic steel producers. Combined with projected strong growth in India’s steel production, these policies are expected to result in India becoming a net importer of iron ore during the outlook period.

India’s iron ore exports are forecast to total 9 million tonnes in 2013, decreasing from an estimated 26 million tonnes in 2012. India’s exports are projected to remain low for the remainder of the outlook period, with net imports expected to peak at around 18 million tonnes in 2016 before domestic supply begins to ramp up.

Exports from West Africa (primarily Guinea and Mauritania) are not projected to have a substantial impact on world markets within the medium term. The large amount of required infrastructure and associated investment to enable large-scale exports is not expected to be developed fully within the outlook period. Although BREE projects that there will be some additional exports from this region, sovereign risks and infrastructure delays are expected to limit the development of a substantial iron ore export industry over the outlook period.

Metallurgical coal prices

Contract prices for high quality metallurgical coal for delivery in the March quarter 2013 were settled at around US$165 a tonne, a slight decrease from US$170 a tonne in the December quarter. Contract prices are forecast to increase over the remainder of 2013 and to average US$172 a tonne for 2013 as a whole (see Figure 4). Over the period 2014 to 2018, metallurgical coal prices are projected to increase slightly (in 2013 US dollars) and to average US$177 in 2018, with prices supported by high costs of marginal supply, given a growing demand.

Figure 4: Metallurgical coal benchmark prices, FOB Australia


World trade in metallurgical coal

In 2013, world metallurgical coal trade is forecast to grow by 4 per cent, relative to 2012, to total 283 million tonnes. Over the remainder of the outlook period, world trade of metallurgical coal is projected to increase at an average annual rate of 5 per cent to reach 357 million tonnes in 2018 (see Table 3). China and India are projected to have the largest growth in imports to 2018 while growth in exports is projected to be primarily sourced from Australia.

Table 3: World metallurgical coal trade (Mt)2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

Metallurgical coal importsEuropean Union 27 47 42 44 47 47 51 51 51Japan 54 53 53 54 55 56 56 57China 38 52 61 73 83 93 97 105

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Korea, Rep. of 32 33 34 35 37 38 39 41Chinese Taipei 4 7 7 7 8 8 8 8India 19 16 22 23 26 28 29 32Brazil 12 13 14 15 16 16 17 17

Metallurgical coal exportsAustralia 133 144 158 176 191 200 208 218Canada 28 28 29 30 31 32 32 32US 63 69 66 63 60 56 52 48Russian Federation 14 17 16 17 17 17 18 18

World trade 253 273 284 305 322 338 345 356

Sources: BREE; IEA.

Metallurgical coal imports

Between 2013 and 2018, China’s metallurgical coal imports are projected to increase 12 per cent a year to reach 105 million tonnes by 2018. The growth in China’s imports is the result of several factors. First, domestically produced coal in China is of lower quality and higher cost than imports. Second, domestic coal reserves are large distances from steel mills in the southern coastal region of China. Third, new steel production capacity will be increasingly located in the western regions of China due to Government plans for shifting future industrialisation and urbanisation further west. While there are some metallurgical coal reserves in China’s west, the region is relatively close to the Mongolian border and steel mills would likely source imports from Mongolia, which has substantial reserves. Fourth, the Chinese Government has adopted a policy of trying to use imported metallurgical coal before drawing on domestic reserves.

India’s imports of metallurgical coal are projected to increase at an annual average rate of 12 per cent over the outlook period to reach 32 million tonnes in 2018. Imports into Brazil are projected to increase at an average annual rate of 5 per cent between 2013 and 2018 and to total 17 million tonnes in 2018. Imports into the EU are projected to increase slightly over the outlook period, growing at an average of 3 per cent a year to reach 51 million tonnes in 2018. The strong growth in imports into Brazil and India reflect projected strong growth in steel production. The import growth into the EU is a consequence of moderate growth in steel production combined with lower metallurgical coal production.

Metallurgical coal exports

Metallurgical coal exports from Australia in 2013 are forecast to increase by 9 per cent to total 158 million tonnes, around the level of exports prior to the 2011 Queensland floods. The impact of the 2013 storms and floods in Queensland on exports is forecast to be minimal. Over the period 2014 to 2018, Australia’s exports of metallurgical coal are projected to increase at an average annual rate of 7 per cent to reach 218 million tonnes in 2018 (see Figure 5). The strong growth will be supported by new and expanded mining projects such as BHP Billiton Mitsubishi Alliance’s (BMA) Caval Ridge (8 million tonnes a year) and Daunia projects (4.5

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million tonnes); Anglo American’s Grosvenor underground mine (5 million tonnes); and the Jellinbah Group’s joint venture Lake Vermont expansion (4 million tonnes). Additional mine output will be supported by expansions to port and rail capacity on the Queensland coast, such as developments at the Port of Hay Point.

Figure 5: Major metallurgical coal exporters


Exports of metallurgical coal from Canada and the Russian Federation are projected to increase slightly over the medium term and to total, respectively, 34 million tonnes and 18 million tonnes in 2018. Exports from Mongolia are projected to increase at around 3 per cent a year to 2018, reaching around 25 million tonnes. The rate of growth is expected to be lower than in recent years due to a substantial cooling in the investment climate in Mongolia.

Exports from the US are forecast to decline in 2013, compared with 2012, and are projected to continue declining year-on-year to total 48 million tonnes in 2018. Infrastructure constraints and associated high freight costs are expected to make US exports less commercially competitive in the medium term.

Australian exports

In 2012–13, Australia’s export volumes of iron ore are forecast to increase by 11 per cent, relative to 2011–12, to total 522 million tonnes, supported by higher production from Fortescue and Rio Tinto. The value of Australia’s iron ore exports in 2012–13 is forecast to decrease by 9 per cent, compared with 2011–12, to total $57.0 billion. The decrease can be attributed entirely to lower forecast prices, despite higher volumes relative to 2011–12.

Over the medium term, projected growth in export volumes from expansions to capacity at a number of mines, such as Fortescue’s Chichester Hub and Solomon Hub expansions, will underpin higher export earnings in 2017–18. However, the effect of higher export volumes on total export earnings will be offset by a projected decline in real iron ore prices. Export volumes are projected to increase to 821 million by 2018 tonnes (see Figure 6) or an average growth of 10 per cent a year over the outlook period. Iron ore export values are projected to trend higher over the medium term and to total $61.6 billion (in 2012–13 dollars) in 2017–18.

Figure 6: Australia’s iron ore exports


Australia’s metallurgical coal export volumes in 2012–13 are forecast to increase by 8 per cent to total 153 million tonnes. Despite the higher export volumes, lower

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forecast prices are expected to result in export earnings for metallurgical coal declining to $23.0 billion, down from $31.6 billion (in 2012–13 dollars) in 2011–12.

Over the remainder of the outlook period export volumes of metallurgical coal are forecast to increase by 7 per cent a year and to total 214 million tonnes in 2017–18. Higher export volumes and relatively stable year-on-year projected prices are expected to result in Australia’s export earnings from metallurgical coal increasing to around $30 billion (in 2012–13 dollars) in 2017–18 (see Figure 7).

Figure 7: Australia’s metallurgical coal exports


Table 6: Steel, iron ore and metallurgical coal outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldContract prices bIron ore c

– nominal US$/t 153 128 119 114 105 99 97 96

– real d US$/t 158 131 119 113 103 96 93 90

Metallurgical coal e

– nominal US$/t 289 210 172 179 180 180 184 188

– real d US$/t 298 214 172 177 176 174 175 177

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaProductionIron and steel gs Mt 7.31 5.39 4.80 4.71 4.65 4.59 4.54 4.48Iron ore Mt 447 504 538 617 708 745 798 831Metallurgical coal Mt 147 147 157 169 188 200 207 218

ExportsIron and steel gs Mt 1.78 1.19 1.00 0.89 0.85 0.83 0.82 0.80Nominal value A$m 1303 983 835 806 774 757 746 729Real value h A$m 1371 1012 835 783 731 695 666 632

Iron ore Mt 407 470 522 604 698 735 788 821Nominal value A$m 58387 62695 56971 64005 69371 66395 69691 71054Real value h A$m 61444 64513 56971 62202 65516 60938 62161 61590

Metallurgical coal Mt 140 142 153 165 184 196 203 214Nominal value A$m 29793 30700 22976 26177 29297 30882 32217 34692Real value h A$m 31353 31590 22976 25439 27669 28344 28736 30071

b fob Australian basis, BREE Australia–Japan average contract price assessment. c Fines contract, 62% iron content basis. d In 2013 US dollars. e High-quality hard coking coal. For example, Goonyella export coal. g Includes all steel items in ABS, Australian Harmonized Export Commodity Classification, chapter 72, ‘Iron and steel’, excluding ferrous waste and scrap and ferroalloys. h In 2012–13 Australian dollars. f BREE forecast. s BREE estimate. z BREE projection.

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Sources: BREE; ABARES; International Iron and Steel Institute; Coal Services Australia; Queensland Coal Board; United Nations Conference on Trade and Development.

58

Gold

Adam Bialowas

Gold prices

In 2012 the gold price averaged US$1699 per ounce (in 2013 dollars), a 5 per cent increase relative to 2011. By the end of 2012 the average price of gold had increased for eleven consecutive years; however, 2012 was the lowest average annual increase in the gold price over this period. Over the course of 2012, the gold price displayed a lower degree of volatility than in 2011, with the standard deviation in average daily prices in 2012 less than half that of 2011.

Figure 1: Quarterly gold price


In 2012, the increase in the gold price was supported primarily by the official sector which increased their net purchases of gold relative to 2011. This increase was able to more than offset the effects on the gold price of lower jewellery and flat investment demand for gold. The decline in jewellery demand for gold was largely the result of a high domestic price of gold in India. Investment demand had a neutral effect on gold prices with a decrease in the demand for bars and bullion being counterbalanced by increased demand for gold backed exchange traded funds (ETFs).

In 2013, the gold price is forecast to decline by 4 per cent per cent relative to 2012 to average around US$1638 an ounce. Prices are expected to fall in response to a decrease in the investment demand for gold expected to decline further if instability in global financial markets diminishes, reducing the appeal of gold as a safe haven investment. The magnitude of the decline in the gold prices is expected to be moderated by net purchases of gold by the official sectors, which are forecast to increase relative to 2012.

Over the remainder of the outlook period (2014 to 2018), the price of gold is projected to continue to decline and average around US$1315 in 2018. The investment demand for gold is expected to decrease in response to an assumed improvement in macroeconomic conditions over the outlook period. First, stability in global financial markets is projected to reduce investment demand for gold based upon its properties as a safe haven investment. Second, improving economic conditions will lead to a willingness among investors to hold a greater share of their wealth in assets other than gold, such as equities and property. Concerns that expansionary monetary programs will lead to high inflation are not expected to be

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realised over the outlook period, reducing the demand for gold as a hedge against inflation.

Fabrication demand

Gold fabrication demand comprises gold used in the manufacture of jewellery, electronics, dentistry, medals, coins and other industrial applications. In 2012 gold fabrication is estimated to have declined by 5 per cent relative to 2011 to 2614 tonnes. Jewellery, which represents the largest component of gold fabrication demand, declined by 4 per cent relative to 2011 to total 1885 tonnes. The majority of this decline is attributed to India where a combination of a higher domestic price for gold and government policies designed to reduce imports of gold led to an 11 per cent decrease in fabrication demand for gold. Demand for gold in other industrial and decorative uses also declined in 2012. Economic conditions in the Eurozone reduced demand for gold by the electronics sector which declined by 5 per cent to 304 tonnes. High prices resulted in a reduction in the demand for gold for decorative purposes, such as gold thread and gold plating, decreasing by 4 per cent to 86 tonnes.

Total world fabrication demand for gold in 2013 is forecast to decrease by 1 per cent, relative to 2012, to total 2580 tonnes. Fabrication demand for gold in 2013 will be heavily influenced by India which is the world’s largest single consumer of fabricated gold. Indian authorities’ concerns about the negative impacts of gold purchases on the economy have led to the implementation of a range of policies aimed at reducing domestic gold demand. Policies already implemented include an increase in the import duty on gold from 4 per cent to 6 per cent, a ban on jewellery imports from Thailand and restrictions upon the ability of banks to make loans for the purpose of purchasing jewellery. A range of financial products designed to make gold less attractive as a store of wealth have also been proposed. These are expected to have a negative impact on Indian jewellery demand in 2013 overriding the effects of a lower gold price.

In China, rising income levels are expected to contribute to increased jewellery demand. However, the speculative component of jewellery demand, which has been a characteristic of Chinese jewellery demand over the past five years, is expected to be reduced.

Over the remainder of the outlook period (2014 to 2018) gold fabrication consumption is forecast to increase at an average annual rate of 3 per cent to total 2978 tonnes in 2018. This projected increase is due to a forecast increase in the demand for jewellery, underpinned by a declining price of gold and a growing middle class. In particular, Indian demand for jewellery is projected to recover in 2014 after recovering from policies introduced in 2013. While Indian consumers may temporarily respond negatively to exogenous shocks in the short term, India’s cultural affinity with gold should help demand return to longer term consumption trends. Chinese demand for jewellery is projected to increase over the outlook period due to weaker gold prices and rising incomes that makes jewellery and other fabricated gold products more affordable for an increasing numbers of consumers.

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Official sector purchases

Central banks expanded their gold holdings in 2012 with net purchases increasing by 17 per cent, relative in 2011, to total 536 tonnes. Purchases of gold were underpinned by central banks in emerging economies that have used gold as a means of diversifying their reserve asset portfolios away from traditional reserve assets such as the US dollar, the euro and the Yen. Central banks that purchased large quantities of gold in 2012 included Russia (55 tonnes), the Philippines (35 tonnes) and Brazil (34 tonnes).

A forecast reduction in both investment and fabrication demand for gold in 2013 is expected to provide scope for central banks to increase their purchases of gold without distorting the market. In 2013, official sector gold purchases are expected to increase to 550 tonnes as central banks continue to diversify their asset portfolios. Central banks in emerging economies are expected to continue as the main buyers.

Over the outlook period, the official sector is expected to remain a net purchaser of gold. Increasing levels of foreign exchange reserves among developing nations suggest that the official sector will remain a net purchaser, assuming central banks maintain the existing ratios of gold in their portfolios. The size of the gold market relative to global reserve holdings implies official sector purchases need to be distributed over an extended period of time to avoid distorting the gold market. The magnitude of these net purchases, however, are expected to decline over the outlook period as improving economic conditions make other forms of assets held by central banks more attractive. As official sector purchases of gold depend on a variety of special domestic circumstances, there is still considerable uncertainty over central bank gold purchases over the outlook period.

Scrap sales

In 2012, the supply of gold from secondary sources, such as the recycling of gold jewellery and electronics, declined by 2 per cent, relative to 2011, to total 1642 tonnes. This occurred despite an increase in the price of gold. The only major market to record an increase in scrap sales was India where the domestic price of gold increased by 24 per cent, providing an indication of the price increase necessary to encourage increased sales from remaining stocks.

In 2013, the quantity of gold sourced from scrap is forecast to decrease 5 per cent, relative to 2012, to total 1560 tonnes in response to lower forecast gold prices. More stable economic conditions in in key gold markets are also expected to reduce financial distress as an incentive for selling gold. Over the remainder of the outlook period the supply of scrap gold is expected to follow changes in the price of gold and to decline to a low of around 1000 tonnes in 2018.

Gold mine production

In 2012, world gold mine production increased by less than one per cent, relative to 2011, to total 2836 tonnes. This result can be attributed to underperformance at

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existing mines through either mine sequencing or other delays and production interruptions. These offset production from new mines that either commenced production or ramped up towards full production in 2012. In particular, labour disputes in South Africa are estimated to have reduced South African gold production by approximately 20 tonnes in 2012.

World gold mine production in 2013 is forecast to grow by 4 per cent, relative to 2012, to total 2956 tonnes. This increase will be supported by a number of large operations commencing production around the world including Barrick Gold and Goldcorp’s joint venture Pueblo Veijo mine in the Dominican Republic (30 tonnes), Detour Gold’s Detour Lake operation in Canada (20 tonnes), Rio Tinto and Turquoise Hill’s Oyu Tolgoi in Mongolia (13.5 tonnes). The growth from new mines will be augmented by existing operations increasing production levels after abnormally low production in 2012 including Freport McMoran’s Grasberg mine in Indonesia and Centara Gold’s Kumtor mine in Kyrgyzstan.

Over the remainder of the outlook period, global gold mine production is projected to increase at an annual average rate of 3 per cent to total 3345 tonnes in 2018. China is expected to remain the world’s largest gold producer; however, the outlook period is expected to see a reordering of the rankings amongst other major gold producing nations.

Gold mine production in the Russian Federation is projected to increase at an annual average rate of 6 per cent to total 307 tonnes by 2018. This will result in Russia overtaking both Australia and the US to become the world’s second largest gold producer. Supporting this increase will be new production from a number of new operations which are due for completion in the outlook period. These include Kinross’ Dvoinoye mine (7 tonnes), Polyus Gold’s Natalka mine (15 tonnes) and Norlisk Nickels Bystrinskoye mine (6 tonnes) which are due to be completed in 2017.

Canada has a number of gold mines, either under construction or committed, that will support production growing at an annual average rate of 9 per cent to total 193 tonnes in 2018. This will result in Canada surpassing South Africa and Peru to become the world’s fourth largest gold producer. Increased production will be supported by Detour Gold Detour Lakes mine (20 tonnes), Goldcorps Elanore mine (18 tonnes) and Newgold’s Blackwater mine (17 tonnes).

Australia’s gold production

Australian gold mine production is expected to increase by 1 per cent, relative to 2011–12, to total 255 tonnes in 2012–13. This marginal increase in supply is a reversal of the previous year which recorded a decline in Australian gold production. New production is expected to come from Regis Resources’ Garden Wells mine (6 tonnes), Millennium Gold’s Nullagine mine (2 tonnes annual production) and Reed Resources’ Meekatharra mine (4.5 tonne annual production). Increased production from Newcrest Mining’s Cadia East and Citigold’s Charters Towers gold mines are also projected. Both of these mines are underground operations and are not scheduled to achieve full production levels until the second half of the outlook

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period. These production increases will be offset by a number of mines that will be reducing production in 2012–13 including St Barbara’s Southern Cross, Rand Mining’s Raleigh, Ramelius Resources Wattle Dam and Polymetals White Dam.

In 2013–14 Australian gold mine production is forecast to increase a further 6 per cent, relative to 2012–13, to total 270 tonnes. Increased production is expected from a number of new mines which are scheduled to commence operations in 2013–14. These include Alkane Resources’ Tommingly mine (1.5 tonnes), Doray Minerals’ Andy Well mine (2 tonnes), Mutiny Gold’s Deflector mine (2 tonnes) and Southern Cross Resources’ Marda mine (1 tonne). The largest new mine scheduled to commence production in 2013–14 is the Tropicana joint venture project by AngloGold Ashanti and Independence Group (14 tonnes) which is expected to be the largest gold mine to be constructed in Australia over the outlook period.

Over the remainder of the outlook period (2014–15 to 2017–18) Australian gold mine production is projected to continue increasing until 2016–17 when it will peak at 299 tonnes. Production increases over this period will be supported by Newcrest Mining’s Cadia East (additional 8 tonnes) and Citigold’s Chaters Towers (10 tonnes) operations reaching full production levels. In 2017–18, Australian gold mine production is forecast to decline to 291 tonnes from its 2016¬17 peak due to a scheduled decline in output from AngloGold Ashanti and Independence Groups’ Tropicana mine.

Australia’s gold exports

Australian exports of refined gold are produced from ore from domestic mine production as well as imports of gold dore (impure gold) and scrap which are imported before being refined into gold bullion and re-exported.

In 2012–13 the volume of Australian gold exports is forecast to increase by 6 per cent, relative to 2011–12, to total 320 tonnes. This reflects a combination of increased mine production over the period and above average levels of internationally sourced gold. In aggregate, the projected volume should support a 10 per cent increase in the value of Australian exports of gold in 2012–13, relative to 2011–12, to total $17 billion.

In 2013–14, an increase in Australian mine production is forecast to result in a 8 per cent increase in the volume of Australian gold exports, relative to 2012–13, to total 347 tonnes. The value of gold exports is forecast to increase by 7 per cent, relative to 2012–13, to total $17.7 billion (in 2012–13 dollars).

Over the remainder of the outlook period, the volume of Australia’s gold exports is expected to peak in 2015–16 at 371 tonnes and then decline to 362 tonnes in 2017–18. This decline reflects lower Australian mine production towards the end of the outlook period and lower volumes of gold sourced from overseas in response to a fall in the gold price over the outlook period. By 2017–18 the value of Australia’s gold exports is projected to be around $13 billion (in 2012–13 dollars).

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Figure 2: Australian gold exports


Table 1: Gold outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldFabricationconsumption t 2760 2614 2580 2642 2741 2848 2917 2978Mine production t 2833 2836 2956 3099 3217 3304 3338 3345Scrap sales t 1661 1642 1560 1400 1300 1200 1100 1000Residual net stock t (1734) (1864) (1936) (1858) (1776) (1655) (1521) (1367)

official sector t (457) (536) (550) (525) (450) (425) (400) (400)private sector t (1283) (1308) (1396) (1358) (1351) (1280) (1171) (1017)producer hedging t 6 (20) 10 25 25 50 50 50

Price b

– nominal US$/oz 1569 1668 1638 1574 1440 1375 1351 1315

– real c US$/oz 1618 1699 1638 1558 1411 1330 1289 1237

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaMine production t 264 253 255 270 291 299 299 291

Export volume t 301 304 320 347 369 371 364 362Export value– nominal A$m 13016 15462 16971 18230 17631 16266 15695 15028– real d A$m 13697 15910 16971 17717 16651 14929 13999 13027Price– nominal A$/oz 1389 1621 1605 1633 1485 1365 1342 1292– real d A$/oz 1462 1668 1605 1587 1402 1253 1197 1120

b London Bullion Market Association AM price. c In 2013 US dollars. d In 2012–13 Australian dollars. f BREE forecast. z BREE projection.Note: Net purchasing and dehedging shown in brackets.Sources: BREE; ABARES; Gold Fields Mineral Services; Australian Bureau of Statistics; London Bullion Market Association.

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Aluminium

Simon Cowling

Prices

The spot price for aluminium averaged US$2055 a tonne in 2012, a decrease of 17 per cent compared to 2011. Prices peaked in February 2012 at around US$2260 a tonne before decreasing to around US$1750 a tonne by August 2012 and finishing 2012 at US$2031 per tonne.

In 2013, the average spot price of aluminium is forecast to increase to around US$2075 a tonne, a rise of around 1 per cent relative to 2012. Forecast consumption growth in emerging economies and lower production growth due to plant closures in Europe and North America are expected to reduce stock holdings and support higher prices in 2013. Scheduled start-ups of new smelters in the second half of 2013 in Asia and the Middle East region are expected to offset some of the production curtailments and limit the prospects of higher price growth in the latter half of 2013.

Over the outlook period (2013 to 2018), the aluminium spot price is projected to increase at an average annual rate of 1 per cent to total US$2178 in 2018. Projected growth in aluminium prices are a result of higher supply costs and demand rising at a faster rate than supply over the medium term. The growing incomes and size of the middle classes in China and India are expected to result in higher demand for automobiles and other aluminium-intensive consumer products over the outlook period and support higher consumption. New smelters are scheduled to start up in response to this growing demand, but curtailments and closures of aluminium smelters in OECD economies are likely to offset this additional production.

Figure 1: Annual aluminium prices and stocks


Consumption

In 2012, world aluminium consumption is estimated to have increased around 4.5 per cent, relative to 2011, to total 44.3 million tonnes. Robust growth in Asian emerging economies more than offset decreases in consumption in Europe attributed to the sovereign debt crisis and onset of austerity measures. Total consumption in Asia is estimated to have increased 10 per cent to 29 million tonnes, underpinned by growth of 13 per cent in China (20 million tonnes in total) and 8.2 per cent in India (1.7 million tonnes in total). Total European consumption decreased 10 per cent to total 7.5 million tonnes, underpinned by substantial drops in demand in Italy (36 per cent compared to 2011) and Belgium (20 per cent). Consumption in

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the US increased 12.7 per cent to total 4.5 million tonnes as a result of on-going recovery in its automotive and construction industries.

World aluminium consumption is forecast to increase to around 46.2 million tonnes in 2013, an increase of 4.1 per cent relative to 2012. This will be driven by further growth in Asia and an expected rebound of economic growth in Europe. China is forecast to be the principal driver of growth in consumption demand, increasing by around 8 per cent, compared to 2012, to total 21.5 million tonnes. China will remain the largest consumer of aluminium, accounting for 46 per cent of total world consumption in 2013. The US is forecast to increase its demand by around 0.5 per cent to total 4.6 million tonnes, underpinned by moderate growth in consumer spending, construction and automobile manufacturing.

Over the outlook period (2013 to 2018), world aluminium consumption is projected to increase at an average annual rate of 5.0 per cent to total around 59.2 million tonnes in 2018. Robust growth in emerging economies will be the main drivers of consumption growth. Consumption in OECD countries is projected to increase, but at much lower rates than non-OECD countries.

Aluminium consumption in China is projected to increase at an average annual rate of 7.7 per to around 31 million tonnes over the outlook period (2013 to 2018). The projected increase will be underpinned by substantial growth in construction as well as demand for cars and other aluminium-intensive consumer products. Unlike consumers in western economies, demand for larger luxury car models is projected to grow in China as per capita incomes continue to increase.

Over the outlook period, consumption demand in the US is projected to be supported by growth in the construction and automotive sectors. Production and sales of vehicles are expected to increase in response to improving economic conditions; however, policies limiting carbon emissions and preferences for smaller, more fuel efficient cars are expected to result in less aluminium used per vehicle. Consumption demand is expected to increase at an average annual rate of 3.3 per cent to total around 5.6 million tonnes in 2018.

A decrease in consumption demand is forecast in Europe in the short term, with a recovery projected to occur later in the outlook period. Estimated consumption demand in Europe fell around 10 per cent in 2012, relative to 2011. Consumption is forecast to decrease a further 1.2 per cent in 2013 to total 7.5 million tonnes due to the expected impacts of austerity measures in several key economies. Over the entire outlook period however, aluminium consumption in Europe is projected to grow, increasing at an average annual rate of 1.1 per cent to around 8 million tonnes in 2018. This growth is principally due to higher consumption in Germany and an assumed improvement in economic conditions.

Production

Global aluminium production is estimated to have increased to around 45.8 million tonnes in 2012, an increase of 2.4 per cent from 2011. Higher production in Asia and

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the Middle East offset declines in Europe where higher energy costs and subdued demand have led to production curtailments and smelter closures. European aluminium production is estimated to have decreased around 3.5 per cent, relative to 2011, to total 8.7 million tonnes. Cost issues also led to production curtailments in both Canada and Australia in 2012.

In 2013, world aluminium production is forecast to increase to around 46.3 million tonnes, 1.2 per cent higher than 2012. Growth in production will be supported by increased output from China, India and the Middle East which is expected to offset further production decreases in OECD economies. Over the outlook period, world production is projected to increase at an average annual rate of around 4.4 per cent to total 59.2 million tonnes. Production is projected to continue growing in China, India and the Middle-East and lead to an eventual shift in shares of world production. In 2018 China is likely to remain the world’s largest aluminium producer; however projected robust growth in India, supported by the scheduled start-up of several new smelters will see it surpass Canada, the US and Australia to become the world’s third largest aluminium producer.

China’s aluminium production is projected to increase at an average annual rate of around 4.6 per cent over the outlook period to total 26 million tonnes in 2018. The increase is due to vertical integration of the production process through investments in power suppliers, and change in the central Government policy on new aluminium projects. In India, production is projected to increase at an average annual rate of around 14.4 per cent to total 3.8 million tonnes in 2018. The increase over the outlook period is supported by new smelters with large production capacities coming online to reach full capacity around 2016.

Aluminium production is expected to increase in North America at an average annual rate of around 3.7 per cent over the outlook period to total 6 million tonnes. Projected lower energy costs associated with the emergence of abundant shale gas supplies are expected to improve the commercial viability of the US aluminium industry and support growth in production. Production of aluminium in the US is projected to increase at average annual rate of 2.6 per cent to total 2.5 million tonnes in 2018. Production in Canada is projected to increase at an average annual rate of 4.6 per cent to total 3.6 million tonnes in 2018, underpinned by new project start-ups.

The Middle East is projected to increase production to 7.2 million tonnes over the outlook period at an average annual rate of around 8.9 per cent. Large scale capital investment in production facilities over the outlook period and access to cheap energy are expected to be the substantial drivers of the production increase. The Middle East region is projected to account for around 16 per cent of global primary production by 2018.

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Australia

Production

In 2012–13, production in Australia is forecast to decrease by 6.5 per cent, relative to 2011–12, to total 1.8 million tonnes. The decrease is due to the closure of the Kurri Kurri smelter in New South Wales that removed around 177 000 tonnes of aluminium production from Australia’s production capacity. Alcoa is currently undertaking a review of their Point Henry smelter in Victoria. Operations are expected to continue to at least mid-2014 as a result of a Government industry assistance package by the Federal and Victorian Governments. In June 2012, the Victorian and Federal Government provided assistance to the Point Henry smelter in Victoria in the form of capital expenditure for repairs and maintenance of the smelter, investment in workplace skills and training, and additional undisclosed activities to improve competitiveness. These assistance measures are expected to remain in place until at least mid-2014.

During 2012, Pacific Aluminium and the Tasmanian State Government were able to secure a power deal which provided for lower energy costs from Hydro Tasmania and resulted in a reduction in production costs for the Bell bay smelter. The deal provides for reduced energy costs to 2025. Due to the Government assistance provided (for the operations in Tasmania and Victoria) allowing on-going operations in these states to continue, no further smelter closures are forecast in the short term. However, higher production costs due to rising energy prices may result in minor production curtailments in 2012–13.

Over the outlook period (2012–13 to 2017–18), Australia’s aluminium production is projected to decrease at an average annual rate of around 2.8 per cent to total 1.6 million tonnes in 2017–18. Government assistance, in the form of lower energy costs and capital injections, is assumed to continue over the outlook period. Nevertheless, an expected drop in total primary production is projected with no new aluminium smelters assessed as likely to start-up over the outlook period.

Exports

Forecast lower production in 2012–13 is expected to cause the volume of Australia’s aluminium exports to decrease 3 per cent, relative to 2011–12, to total 1.5 million tonnes. Export earnings are forecast to decrease 14 per cent to $3.3 billion (2012–13 dollars) due to a combination of lower export volumes and a lower Australian dollar aluminium price.

Over the outlook period, Australian aluminium export volumes are projected to decrease at an average annual rate of around 2.1 per cent, from 2012–13, to around 1.5 million tonnes in 2017–18. The value of Australian aluminium exports is projected to decrease to $2.9 billion (in 2012–13 dollars) with lower export volumes offsetting projected price increases over the outlook period.

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Figure 2: Australia’s aluminium exports


Alumina

Prices

Alumina spot prices decreased by around 16 per cent in 2012, relative to 2011, to reach US$325 a tonne (in 2013 dollars). In 2013 alumina spot prices are forecast to increase to around US$342 a tonne, a 5 per cent increase relative to 2012. The forecast increase is a result of growth in demand as higher global aluminium production translates into an increased requirement for alumina as an input into production. Over the outlook period the spot alumina price is projected to increase at an average annual rate of 2.5 per cent to around US$381 a tonne in 2018.

Australia’s alumina production

In 2012–13 Australia’s alumina production is forecast to increase by around 19 per cent, relative to 2011–12, to total 22.9 million tonnes. The commissioning of Rio Tinto Alcan’s Yarwun refinery near Gladstone is the principal driver of the increase and will add around 2 million tonnes of additional Australian alumina production capacity. Production at BHP Billiton’s Worsley refinery in Western Australia is expected to reach full capacity by the end of 2012–13 after completion of the 1.1 million tonne a year expansion. Pacific Aluminium’s Gove refinery near Nhulunbuy will continue to operate after the Northern Territory Government agreed to release supplies of gas to power the refinery. The use of heavy oil as a fuel source was a major cost driver affecting the commercial viability of the Gove refinery which is now expected to remain open through the outlook period.

Australia’s alumina production is forecast to increase by 3 per cent in 2013–14 to total 23.6 million tonnes. The ramping up of recent expansions to full capacity will be the principal source of this growth. Over the remainder of the outlook period from 2014–15 to 2017–18, no additional expansion projects are expected to start up and alumina production is forecast to remain stable at 23.6 million tonnes.

Australia’s alumina exports

Projected decreases in Australian aluminium production are expected to result in additional surplus alumina production being exported to growing Asian markets. Alumina export volumes are forecast to increase by 19 per cent in 2012–13, relative to 2011–12, to total 19.7 million tonnes. Over the outlook period (2013 to 2018), alumina export volumes are projected to increase to around 20.4 million tonnes based on an average annual rate of around 3.5 per cent.

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The value of Australia’s alumina exports is forecast to increase by around 14 per cent in 2012–13, relative to 2011–12, to total $6.1 billion dollars. Forecast higher export volumes and prices will both support this increase. Alumina export values are projected to increase to around $6.7 billion (in 2012–13 dollars) over the outlook period (2012–13 to 2017–18), with an average annual growth rate of 4.1 per cent.

Bauxite exports

Australian bauxite exports are projected to increase over the outlook period, underpinned by the expected start-up of new mines such as Cape Alumina Pisolite Hills mine (7 million tonnes per annum) and Rio Tinto’s South of Embley mine (22.5 million tonnes per annum). Bauxite export volumes are forecast to increase by around 6 per cent in 2012–13, to total 11.1 million tonnes. Exports volumes are projected to increase at an average annual rate of 9 per cent over the outlook period, to around 17.9 million tonnes in 2017–18.

In 2012–13, Australia’s bauxite export earnings are forecast to increase by around 3 per cent, relative to 2011–12, to total $314 million dollars, supported by higher production. The increase in export values is projected to continue over the outlook period (2013 to 2018), with the value of bauxite exports increasing at an average annual rate of 6.0 per cent to around $434 million (in 2012–13 dollars).

Figure 3: Australia’s alumina exports

Please refer to page 81of the Resources and Energy Quarterly – March quarter 2013 PDF version.

Table 1: Aluminium and alumina outlookunit 2011 2012 2013 f 2014 z 2015 z 2016

z 2017 z 2018 z

WorldProductionPrimary aluminium kt 44568 45782 46340 49533 52571 55149 57744 59254ConsumptionPrimary aluminium kt 42398 44327 46162 49216 52259 54947 57636 59262Closing stocksPrimary aluminium b kt 6999 7860 8037 8355 8667 8868 8976 8968– weeks consumption wks 8.6 9.2 9.1 8.8 8.6 8.4 8.1 7.9PricesWorld aluminium c– nominal US$/t 2402 2017 2075 2137 2187 2255 2289 2315

USc/lb 109 91 94 97 99 102 104 105

– real d US$/t 2476 2055 2075 2116 2142 2181 2183 2178USc/lb 112 93 94 96 97 99 99 99

Alumina– nominal spot US$/t 374 319 342 385 390 389 399 405– real spot d US$/t 386 325 342 381 382 376 380 381

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

Australia

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ProductionPrimary aluminium kt 1938 1938 1812 1800 1773 1736 1644 1635Alumina kt 19041 19283 22881 23580 23580 23580 23580 23580Bauxite Mt 69 73 79 81 83 84 85 85

ConsumptionPrimary aluminium kt 252 235 164 162 160 156 148 147

ExportsPrimary aluminium kt 1686 1693 1646 1638 1613 1579 1496 1488Nominal value A$m 4178 3797 3344 3446 3456 3448 3326 3336Real value e A$m 4397 3907 3344 3349 3263 3164 2967 2892Alumina kt 16227 16592 19737 20070 20123 20195 20374 20392Nominal value A$m 5218 5146 6050 7179 7326 7494 7701 7774Real value e A$m 5491 5295 6050 6976 6919 6878 6869 6738Bauxite kt 8595 10518 11127 13134 14254 15483 17403 17874Nominal value A$m 229 296 314 368 400 434 488 501Real value e A$m 241 305 314 358 377 398 435 434Total value– nominal A$m 9625 9239 9708 10993 11182 11375 11515 11611Real value e A$m 10129 9507 9708 10683 10560 10440 10271 10065

b Producer and LME stocks. c LME cash prices for primary aluminium. d In 2013 US dollars. e In 2012–13 Australian dollars.f BREE forecast. z BREE projection.Sources: BREE; ABARES; London Metal Exchange; World Bureau of Metal Statistics.

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Copper

Oliver Hough

Prices

In 2012 copper prices averaged US$8098 per tonne (in 2013 dollars), an 11 per cent decrease from the 2011 average price. In 2012 prices peaked at US$8650 before finishing 2012 at US$8046. Reported copper stocks at the end of 2012 remained at a similar level to the end of 2011 at 2.7 weeks of consumption.

Copper prices are forecast to average around $US7778 a tonne in 2013, a decrease of 4 per cent compared to 2012. This forecast decrease in prices is the result of copper supply growing faster than copper consumption. The increase in supply will come from a number of large recently commissioned mines in Indonesia, Peru and Mongolia ramping up to full production in 2013. Copper consumption is forecast to grow, primarily in emerging economies, but by a lower amount than the increase in production. As a result, copper stocks are forecast to increase to 3.2 weeks of consumption in 2013.

Figure 1: Quarterly copper prices


For the outlook period (2013 to 2018), copper prices (in 2013 dollars) are projected to decrease to around US$6900 per tonne in 2016, as a result of increased production, and then recover to around US$7100 per tonne in 2018 due to projected higher demand growth. Stocks are projected to peak at 3.9 weeks of consumption in 2015 before declining to around 1.5 weeks of consumption in 2018.

Figure 2: Annual Prices and Stocks


Consumption

In 2012, world copper consumption is estimated to have increased by over 5.5 per cent, compared with 2011, to total 20.5 million tonnes. Higher consumption was driven mainly by China which increased its consumption by 12 per cent to 8.8 million tonnes and accounted for around 43 per cent of world copper consumption in 2012. Copper consumption in other emerging economies also continued to grow in 2012. In particular, consumption increased by 13 per cent in India (454 thousand tonnes), 9 per cent in Brazil (457 thousand tonnes) and 73 per cent in Mexico (402 thousand tonnes).

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In the European Union, copper consumption decreased 7 per cent in 2012, relative to 2011, to total around 3.1 million tonnes, mainly due to lower consumption in Germany. Consumption in Japan and the Republic of Korea also decreased by 2 per cent and 3 per cent, respectively. In the US, consumption was 3 per cent higher in 2012, relative to 2011, to total 1.8 million tonnes.

World consumption in 2013 is forecast to increase 4 per cent, relative to 2012, to around 21.4 million tonnes. Growth will continue to be supported by higher consumption in China and other emerging economies. Consumption in Europe, the US and other OECD countries is forecast to grow moderately and in some cases, decline.

Over the outlook period (2013 to 2018) world copper consumption is forecast to grow at an average annual rate of 4.6 per cent to total around 26.6 million tonnes in 2018. Growth in copper consumption is expected to come primarily from emerging economies such as China and India. Consumption in some OECD countries is expected to recover as general economic conditions improve, but growth rates are projected to remain low over the outlook period.

Copper consumption in China is projected to increase at an annual average rate of 6.7 per cent over the outlook period to total around 13 million tonnes in 2018. Robust growth in residential construction and electricity transmission networks will be the principal drivers of the increase in China’s copper consumption. Based on projected growth rates, China’s share of world copper consumption will increase from 43 per cent in 2012 to 49 per cent in 2018.

China’s 12th Five-Year Plan outlined targets and policies for 2011 to 2015 and included a planned urbanisation rate of 51.5 per cent and the building of an additional 36 million apartments for low income earners. Preparation for this rapid rate of shift and population increase in urban and industrial areas include plans to expand infrastructure by improving and increasing the size of electricity networks, transit systems and housing.

Planned infrastructure improvements in China demand significant copper usage which is the underlying reason behind the large growth in demand for copper in China. This anticipated growth and demand is expected to continue for the outlook period and beyond. This demand is complemented by higher demand for electronic goods, and other durable goods that require copper and are supported by an emerging larger middle class.

Over the outlook period, increased copper consumption is projected for other emerging economies such as India, Brazil, and Turkey. Consumption for these emerging economies, as in China, is projected to grow at average rates between 7 and 9 per cent out to 2018. This growth will be a result of increased demand for consumer durables, improvements to infrastructure and increased development of housing. India, in particular, is expected to implement large infrastructure upgrades over the outlook period to improve the reliability and extent of its electricity transmission networks.

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Copper consumption in Europe in 2013 is forecast to increase 0.7 per cent to total around 3.8 million tonnes; although higher than 2012, this is still below total consumption in 2011. Improved economic activity in Germany and the Russian Federation will underpin moderate growth in European consumption in 2013; however this will be mostly offset by decreased consumption in other European countries that are expected to have lower investment rates as a result of assumed low or negative growth..

For the remainder of the outlook period, copper consumption in Europe is projected to increase at an average annual growth rate of 1.5 per cent a year to total 4.2 million tonnes in 2018. Although projected to increase, copper consumption in Europe will remain lower than the high levels of the previous decade due to lower levels of housing construction and infrastructure investment, particularly in countries that currently have substantial sovereign debt issues to manage. Germany is projected to be the principal contributor to growth in Europe’s copper consumption in the medium term, supported by sustained growth in its export-focused manufacturing industries.

In the US, copper consumption is projected to rise at an average annual rate of around 0.5 per cent over the outlook period to total 1.9 million tonnes in 2018. Eventual improvements in economic activity, particularly residential construction, manufacturing and fixed asset investment, will support moderate increases in copper consumption. As with Europe, copper consumption in the US is not projected to return to the high levels of the previous decade over the 2013 to 2018 outlook period.

Production

Mine Production

In 2012, estimated global copper mine production increased by 4.7 per cent relative to 2011, to total 17 million tonnes. This increase is attributable primarily to mines in South America resuming production following the resolution of labour disputes. In addition, production from China and the Democratic Republic of Congo increased more than 25 per cent due to the commissioning of new mines, capacity expansions at existing mines and higher utilisation rates.

In 2013 world copper mine production is forecast to have its largest increase since 2004 as a result of new mines starting or ramping up to full production across Asia, Africa, Oceania and Latin America. These include the Grasburg mine in Indonesia (750 000 tonnes capacity per year), Konkola copper mines in Zambia (380 000 tonnes capacity per year) and the Antapaccay mine in Peru (160 000 tonnes capacity per year). Turquoise Hill Resources’ Oyu Tolgoi mine (400 000 tonnes capacity per year) in Mongolia is expected to started commercial production in June 2013 after experiencing projects cost increases and disputes with the Government of Mongolia over the distribution of the mines earnings. These have also led to delays in feasibility studies for the second stage of development.

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World copper mine production is projected to increase at an average annual rate of 6 per cent to total around 24.4 million tonnes in 2018. This output growth will be driven by additional, large copper mines opening in Peru, Chile and Indonesia over the outlook period.

Peru has the projected fastest average growth rate of mined copper between 2013 and 2018. Production is projected to increase at an average annual rate of 14 per cent to total 3 million tonnes by 2018. New mines scheduled to commence production during this period include Xstrata’s Las Bambas mine (up to 400 000 tonnes capacity per year), Monterrico Metals’ Rio Blanco mine (190 000 tonnes capacity per year), and Chinalco’s Toromocho mine (250 000 tonnes capacity per year).

Chile produced around 5.4 million tonnes of mined copper in 2012 and accounted for 32 per cent of total world production. Chile’s copper production is projected to grow at an average annual rate of 1.5 per cent to total around 5.9 million tonnes by 2018. A number of large copper mines are also scheduled to start production within the outlook period including Codelco’s Mina Minestro Hales mine (170 000 tonnes capacity per year), Pan Pacific Copper’s Caserones mine (180 000 tonnes capacity per year), Teck’s Quebrada Blanca Phase 2 expansion (200 000 tonnes capacity per year), and the KGHM-Sumitomo Sierra Gorda mine (227 000 tonnes capacity per year).

Refined Production

World production of refined copper in 2013 is forecast to increase 5.6 per cent, relative to 2012, to 21.6 million tonnes. This increase is driven primarily by China, which accounts for almost half of the additional production in 2013. China’s production of refined copper is forecast to increase 9 per cent, to total 6.4 million tonnes. This expansion is primarily due to 3 refineries increasing their capacity, Shandong Fangyuan (additional 100 000 tonnes per year), Guangxi Wuzhou (additional 100 000 tonnes per year) and Daye/Hubei (additional 200 000 tonnes per year). A number of small solvent extraction-electrowinning (SX-EW) - a process that involves leeching of copper from the soil into solvents and then depositing the copper onto cathodes through an electrolyte process - refineries in Africa (Zambia and Democratic Republic of Congo) and Mexico are also expected to start-up and support higher refined copper production in 2013.

Over the remainder of the outlook period, world refined copper production is projected to increase at an average annual rate of about 3 per cent, to total 26 million tonnes in 2018. China is expected to be the main contributor to growth in world refined copper production with its share of total world production increasing from 29 per cent in 2012 to 32 per cent in 2018. India’s production of refined copper is also projected to increase substantially over the period, growing at an average annual rate of 10 per cent to total 1.2 million tonnes in 2018. Previously anticipated growth in SX-EW technology within Chile has slowed, however, there is still growth anticipated in other Latin American countries (Mexico and Peru) and Africa (Zambia and Democratic Republic of Congo).

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Australia

Production

Australian copper mine production in 2012–13 is forecast to increase 8 per cent, relative to 2011–12, to total around 1 million tonnes. Forecast higher production is expected to come mainly from Western Australia as the recently commissioned Sandfire Resources’ DeGrussa mine (77 000 tonnes capacity per year) ramps up to full production.

Copper mine production in Australia for 2013–14 is forecast to increase by 14 per cent, relative to 2012–13, to total 1.1 million tonnes. Additional production is forecast to come from various mines across Australia increasing their production rates. This includes MMG Limited’s Golden Grove mine focussing on copper, Sandfire Resources’ DeGrussa mine ramp up to full capacity, Ernst Henry underground expansion ramp up (50 000 tonnes capacity per year) and Newcrest’s Cadia Valley mine which includes the old Cadia Hill, Cadia East and Ridgeway mines increasing production.

In the medium term, Australian copper mine production is projected to increase at an average annual rate of 4.4 per cent to total around 1.2 million tonnes in 2017–18. Average annual growth out to 2015–16 is projected to average 4.5 per cent to total 1.2 million supported by anticipated production from Pilbara VMS. Production is projected to decline after 2015–16 due to a change of focus from copper to magnetite at IMX Resource’s Cairn Hill mine and scheduled scale down of Sandfire Resources’ DeGrussa mine.

Unlike other major copper producing countries, Australia’s does not currently have large copper projects (capacity of over 100 000 tonnes per year) under development that are likely to start-up during the outlook period. BHP Billiton’s Olympic Dam expansion project was postponed in 2012 to consider more cost effective development options. The project may still proceed in a different form, but production from the expansion is not expected to start until after 2018.

Australian production of refined copper in 2012–13 is expected to decrease relative to 2011–12 by 5.5 per cent, to total to 459 000 tonnes. This decrease is due power outages disrupting output at Olympic Dam and also at the Port Pirie refinery. Production at Xstrata’s Townsville refinery has also been lower than expected due to lower concentrate production at the Ernest Henry mine and lower planned processing of oxide ores at the Tintaya mine which is approaching the end of its mine life.

In 2013–14, Australian production of refined copper is forecast to increase by 9 per cent, to total 500 000 tonnes. This will be supported by Olympic Dam returning to full production following power outages in 2012–13, and the Townsville refinery forecast production returning to capacity. Over the outlook period, Australia’s refined copper production is projected to decrease to 221 000 tonnes in 2017–18 as a result of the Townsville copper refinery closing at the end of 2016. Higher than

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expected development costs for Ivanhoe Australia’s Mt Dore SX-EW operation has delayed the only new planned SX-EW refining capacity in Australia.

Exports

In 2012–13, the volume of Australian copper exports (in metallic content) are forecast to increase 3 per cent, relative to 2011–12, to total 951 000 tonnes. This increase will be supported by higher exports of copper ores and concentrates, but will be partly offset by lower levels of refined exports. Australia’s copper export earnings are forecast to decrease 3 per cent in 2012–13 to around $8.6 billion. Forecast lower copper prices received by Australian producers are expected to offset the projected increase in copper export volumes.

The value of Australia’s copper exports are forecast to rebound 11 per cent in 2013–14 to total $9.5 billion (in 2012–13 dollars). This will be the result of a forecast 10 per cent increase in the volume of Australia’s copper exports (by metallic content). Over the remainder of the outlook period, the volume of Australia’s copper exports is projected to increase at an annual average rate of 2.3 per cent to total 1.3 million tonnes in 2017–18. In 2017–18, the value of Australia’s copper exports is projected to remain broadly consistent with 2013–14, in real terms, with higher export volumes offsetting lower real prices.

Figure 3: Australia’s copper exports


Table 1: Copper outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldProduction– mine kt 16245 17019 18053 19011 21259 22859 23701 24386– refined kt 19791 20424 21571 22355 23674 24082 25316 26044Consumption kt 19481 20549 21396 22279 23273 24340 25452 26631Closing stocks kt 985 1078 1252 1328 1729 1471 1335 748– weeks consumption wks 2.6 2.7 3.0 3.1 3.9 3.1 2.7 1.5

Price LME– nominal US$/t 8852 7948 7788 7575 7075 7225 7475 7625

USc/lb 401.5 360.5 353.2 343.6 320.9 327.7 339.1 345.9– real b US$/t 9126 8098 7788 7498 6931 6988 7131 7175

USc/lb 413.9 367.3 353.2 340.1 314.4 317.0 323.5 325.5

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaMine output kt 952 926 1001 1144 1186 1204 1195 1197Refined output kt 485 486 459 500 501 491 311 221Exports– ores and conc. c kt 1750 1814 2146 2383 2536 2640 3273 3614– refined kt 375 395 372 404 405 396 251 178Nominal value A$m 8422 8501 8562 9734 9738 9434 10391 11027

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Real value d A$m 8863 8748 8562 9460 9197 8659 9269 9558

b In 2013 US dollars. c Quantities refer to gross weight of all ores and concentrates. d In 2012–13 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABARES; Australian Bureau of Statistics; International Copper Study Group; World Bureau of Metal Statistics.

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Nickel

Simon Cowling

Prices

Nickel spot prices averaged US$17 835 a tonne in 2012 (in 2013 dollars), 23 per cent lower than 2011 (see Figure 1). Lower prices through the year were underpinned by higher production of refined nickel and rising nickel stocks. Prices peaked in February at around US$21 393 a tonne before gradually decreasing to around US$14 734 a tonne in August 2012 and finishing the year at US$17 085 a tonne.

Figure 1: Quarterly nickel prices


The average spot price of nickel is forecast to decrease around 2.3 per cent in 2013 to US$17 586 a tonne. Weak business sentiment is expected to keep nickel prices low, although the volatility that has characterised nickel prices in recent years may at times push prices to higher levels for short periods of time. Nickel stocks which are forecast to increase to 7.8 weeks of consumption in 2013 (see Figure 2).

The nickel spot price is projected to increase over the outlook period (2013 to 2018) at an average annual rate of 2.5 per cent to around US$20,728 (in 2013 dollars) in 2018. Projected demand growth, underpinned by increased construction activity in China and India, and rising industry supply costs will support higher prices over the medium term. Global stocks are projected to decrease marginally over the outlook period (2013 to 2018) as the increase in nickel consumption outpaces increases in refined production, supporting slightly higher prices (see Figure 2). New nickel refineries in Asia, Africa and South America (including full production at Onça Puma) are scheduled to start up over the outlook period to provide for the growing demand.

Figure 2: Annual nickel prices and stocks


Consumption

In 2012, world nickel consumption is estimated to have increased around 3 per cent, relative to 2011, to total 1.7 million tonnes. Consumption decreases in the European Union associated with the onset of Government austerity measures were offset by growth in emerging Asian economies, particularly China and India. Consumption in China increased 9 per cent (770 000 tonnes in total) and in India increased 24 per

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cent (43 000 tonnes in total), supporting a total demand increase in Asia of around 5 per cent to 1.1 million tonnes. Total European Union consumption decreased by 1 per cent relative to 2011, to total 331 000 tonnes in 2012, underpinned by a 5 per cent fall in demand by the European Union’s largest consumer, Germany. Consumption in the US increased by around 2 per cent to total 136 000 tonnes in response to higher steel production.

World nickel consumption is forecast to increase to around 1.7 million tonnes in 2013, an increase of 3 per cent relative to 2012. Growth in nickel demand will be underpinned by growing world steel production, particularly in emerging economies such as China, with a forecast 5 per cent increase in demand to 810 000 tonnes, and India, with a forecast 12 per cent increase to 48 000 tonnes. Consumption in Japan is forecast to increase by around 8 per cent compared to 2012 to total 145 000 tonnes in 2013. The US is forecast to increase consumption by 2 per cent to total 138 000 tonnes. In the Republic of Korea, consumption is forecast to increase to 83 000 tonnes, an increase of around 3 per cent relative to 2012. However, consumption in the European Union is forecast to decrease by 3 per cent in 2013, relative to 2012, and to total 320 000 tonnes.

Over the outlook period (2013 to 2018), world nickel consumption is projected to increase at an average annual rate of 3 per cent to around 1.9 million tonnes in 2018. Consumption in emerging economies is projected to continue growing at a faster rate than developed economies as a result of substantially higher rates of fixed capital investment and growth in steel production.

Over the outlook period (2013 to 2018), nickel consumption in China is projected to increase at an average annual rate of around 3 per cent to total around 905 000 tonnes. Projected robust growth in steel consumption to support infrastructure construction and housing investment will lead to higher consumption of nickel. The use of nickel pig iron (NPI) is projected to make up a proportion of the nickel consumed in China. NPI is a ferronickel pig iron produced by smelting low grade nickel ores (often nickel laterite) as a substitute for conventional refined ferronickel (25–40 per cent nickel). Estimates of the amount of NPI projected to be used are uncertain, and will be affected by global nickel supply and price swings.

India’s nickel consumption is projected to increase over the period to support its projected growth in steel production. Nickel consumption is projected to grow over the outlook period at an average annual rate of 7 per cent, the fastest demand growth of any economy, to total 65 000 tonnes by 2018.

Projected growth in the US construction and steel sectors associated with assumed improvements economic conditions, will support higher nickel consumption in the US. Over the outlook period, consumption in the US is projected to increase at an average annual rate of 1 per cent to total 142 000 tonnes in 2018.

Consumption demand in Europe is forecast to increase over the outlook period at an average annual rate of 2 per cent to total 405 000 tonnes by 2018. The main contributor to growth in Europe will be Germany where nickel consumption is

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projected to increase at an average annual rate of 3 per cent to around 103 000 tonnes. Consumption in the United Kingdom is projected to increase to 26 000 tonnes in 2018, at an average annual rate of around 2 per cent. Ongoing sovereign debt challenges and austerity programs are key downside risks to increased European consumption.

Mine production

Mined nickel production increased to around 2 million tonnes in 2012, an increase of 5 per cent compared to 2011. Curtailment of production in the European Union due to increased production costs and depressed demand were offset by increased production in Indonesia and the Philippines. Indonesia increased production by 13 per cent to total 335 000 tonnes, with the Philippines increasing its output by 11 per cent to total 305 000 tonnes. In both countries, higher production has supported increased exports of laterite ore to China.

Production in the European Union decreased around 24 per cent, relative to 2011, to total 44 000 tonnes with the principal driver reduced production at the Talvivaara mine in Finland due to natural weather occurrences and then environmental concerns. Increased production costs and lower prices also led to mine closures and suspensions in Canada where mine production decreased 7 per cent to total 203 000 in 2012.

In 2013, world nickel production is forecast to increase to around 2.1 million tonnes, 0.6 per cent higher than 2012. A ramp up in production at Skerritt International’s joint venture Ambotovy mine in Madagascar (60 000 tonnes), restart of full production at the Talvivaara mine in Finland and start-up of First Quantum’s Kevista project (10 000 tonnes), also in Finland, are expected to offset forecast lower production in Australia.

Over the outlook period, world nickel production is projected to increase at an average annual rate of around 2 per cent to 2.3 million tonnes. New mines in Canada, and the Philippines, underpin the growth in production. Ramp up at Skerritt International’s joint venture Ambotovy mine in Madagascar is projected to underpin the increased production from Africa over the outlook period.

Production in Asia is projected to increase at an average annual rate of 2 per cent between 2013 and 2018 to total 812 000 tonnes. Increased production in Indonesia and the Philippines, generated from laterite reserves, are projected to underpin the increase in production. Supporting higher production in Asia will be PT Vale Indonesia’s Sulawesi mine expansion in Indonesia (47 000 tonnes), and the CTP Construction and Mining Corporation’s Adlay Cagdianao Tandawa mine (30 000 tonnes) in the Philippines. A large percentage of the mine production from these emerging economies is projected to be exported to China for refinement.

Production in Europe is projected to increase at an average annual rate of around 1 per cent in the medium term to total 367 000 tonnes in 2018. Finland will be the main driver of growth due to the ramp-up of production at the First Quantum

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Kevista mine (initial capacity 10 000 tonnes with a view to increase to 15 000 tonnes).

Refined production

Production of refined nickel increased to around 1.7 million tonnes in 2012, 9 per cent higher than 2012 as a result of higher production in Brazil, Colombia, China and Australia. These increases offset lower refined production in Europe which decreased by 2 per cent, relative to 2011, to total 516 000 tonnes. Production in China increased by 19 per cent, relative to 2011, to total 520 000 tonnes. This made China the largest refined nickel producer in the world with a market share of 30 per cent.

World refined nickel production is forecast to be more or less unchanged compared to 2012, and to total 1.7 million tonnes in 2013. A production ramp up at the Skerritt International’s joint venture Ambatovy (60 000 tonnes) refinery in Madagascar, increased demand for nickel in China as a production input for stainless steel and expansion of the Niihama plant in Japan (30 000 tonnes) are forecast to be the main drivers behind the increase. The on-going shut down of the Vale Onça Puma refinery in Brazil due to smelter problems, and curtailments in Australian production are forecast to offset these production increases.

Over the outlook period, refined production is projected to increase at an average annual rate of 2 per cent to total 1.9 million tonnes in 2018. The restart of the Onça Puma mine and continued production from the Ambatovy refinery, in addition to start-up of the second POSCO plant in the Republic of Korea (24 000 tonnes), are projected to support these higher volumes.

China is projected to remain the largest contributor to global refined production in the medium term. Its refined nickel production is projected to increase to 555 000 tonnes in 2018 at an average annual rate of around 1 per cent. The start-up of the Jinchuan Fangchengang smelter and refinery (30 000 tonnes) is assumed to be a main driver of this growth. Supply of refined production materials for China is projected to come from laterite deposits in Indonesia and the Philippines. The use of nickel pig iron within China for stainless steel production is projected to continue over the outlook period.

Production in South America is projected to increase at an average annual rate of 2 per cent over the outlook period to total 90 000 tonnes in 2018. The increase is driven by the assumed restart of Vale’s Onça Puma nickel project in Pará, Brazil following the shutdown of operations in June 2012. Production of nickel is not projected to restart until the first half of 2014.

Production in Europe is projected to decrease between 2012 and 2018 at an average annual rate of –0.2 per cent and to total 509 000 tonnes. No new refineries are projected to start-up over the outlook period due to limited demand growth and rising production costs. Some production ramp ups at European refineries are

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projected over the outlook period, but these will not be enough to offset projected production curtailments in other European countries.

Australia

Production

Mined nickel production in Australia during 2012–13 is estimated to decrease 3 per cent, relative to 2011–12, to total 229 000 tonnes. The decrease is due to a 30 per cent reduction in output at Nickel West’s Mt Keith mine and Xstrata Nickel Australia placing its Cosmos mine on care and maintenance. In 2013–14, mined nickel production in Australia is forecast to decrease by a further 6 per cent, compared to 2012–13, to total 216 000 tonnes. This decrease is forecast to be underpinned by an ongoing 30 per cent reduction at Nickel West’s Mt Keith mine.

In the medium term, from 2013–14 to 2017–18, Australian mine production is projected to increase at an average annual rate of 2 per cent to around 265 000 tonnes. The projected opening of Norlisk’s Honeymoon Well mine later in the outlook period is projected to offset production decreases within Australia due to increased production costs and depleted ore bodies. The Honeymoon Well mine is projected to provide around 24 000 tonnes of nickel ore when opened and operating at full production.

Refined production

Refined production in Australia during 2012–13 is forecast to increase 2 per cent, relative to 2011–12, to total 124 000 tonnes. Higher production from Minara Resources’ Murrin Murrin refinery in Western Australia following technological and engineering improvements will be the main source of this growth. Output at First Quantum’s Ravensthorpe mine in Western Australia is forecast to increase in 2012–13 as a result of a ramp-up in production. Refined nickel production at Nickel West’s Kwinana refinery is forecast to remain around 2011–12 levels. Production of intermediate product from Nickel West’s Kalgoorlie smelter is expected to decrease by around 65 per cent compared to 2011–12, to total 17 000 tonnes. This decrease will be underpinned by an estimated on-going shift by Nickel West to concentrate production operations on the higher added value refined nickel.

Over the outlook period (2012–13 to 2017–18), refined nickel production is projected to remain relatively stable and to total 125 000 tonnes in 2017–18. The projected increase is a result of increasing efficiencies and no new refineries are anticipated to start up during the period. Higher energy, labour and operating costs are a downside risk, and could result in production curtailments across the outlook period.

Exports

Forecast higher production of refined nickel in 2012–13 is expected to support higher volumes of Australian nickel exports which are forecast to increase 2 per cent, relative to 2011–12, to around 246 000 tonnes (see Figure 3). The growth over 2011–

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12 is underpinned by increased production in 2012–13 of refined nickel at Minara Resources’ Murrin Murrin refinery in Western Australia. Export earnings are forecast to decrease 12 per cent to $3.3 billion (2012–13 dollars) due to a lower forecasted Australian dollar nickel price in 2012–13.

Australian nickel export volumes are projected to increase at an average annual rate of around 2 per cent to total 276 000 tonnes in 2017–18. The increase will be supported by the Ravensthorpe project ramping up to full production and the projected start-up of the Honeymoon Well mine late in the outlook period. The value of Australian nickel exports is projected to increase at an average annual rate of 2 per cent to $4.7 billion (in 2012–13 dollars) in 2017–18, supported by increased mine production and a higher real Australian nickel price over the outlook period.

Figure 3: Australian nickel exports


Table 1: Nickel outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldProduction– mine kt 1932 2034 2048 2110 2160 2219 2273 2295– refined kt 1613 1750 1754 1782 1821 1873 1907 1917Consumption kt 1607 1661 1715 1784 1833 1872 1903 1938Stocks kt 172 217 256 254 242 243 247 226– weeks consumption 5.6 6.8 7.8 7.4 6.9 6.8 6.7 6.1

Price LME– nominal US$/t 22854 17505 17586 18932 20282 20925 21436 22028

Usc/lb 1037 794 798 859 920 949 972 999– real b US$/t 23560 17835 17586 18741 19870 20240 20450 20728

Usc/lb 1069 809 798 850 901 918 928 940

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

AustraliaProduction– mine cs kt 195 236 229 216 233 238 251 265– refined kt 101 122 124 122 126 126 127 125– intermediate kt 60 70 51 48 48 47 54 64

Export volume ds kt 210 240 246 238 251 252 263 276Export value– nominal s A$m 4096 4056 3321 3883 4419 4617 4949 5381– real es A$m 4311 4174 3321 3774 4173 4238 4415 4665

b In 2013 US dollars. c Nickel content of domestic mine production. d Includes metal content of ores and concentrates, intermediate products and nickel metal. e In 2012–13 Australian dollars. f BREE forecast. s BREE estimate. z BREE projection.Sources: BREE; ABARES; Australian Bureau of Statistics; International Nickel Study Group; London Metal Exchange; World Bureau of Metal Statistics.

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Zinc

Adam Bialowas

Prices and stocks

In 2012, zinc prices decreased by 12 per cent relative to 2011, to average US$1984 a tonne (in 2013 dollars (see Figure 1). Downward pressure was placed on prices throughout the year by on-going economic uncertainty in the Eurozone and an easing of economic growth in China. These factors reduced global zinc demand in 2012, and led to an increase in global stocks. Zinc stocks, already at high levels, rose to an equivalent of 9 weeks of global consumption at the end of 2012.

Figure 1: Quarterly zinc prices


The price of zinc is forecast to average around US$1983 in 2013, more or less unchanged from 2012. This result is underpinned by forecast higher consumption in China and OECD nations as a result of an assumed improvement in economic conditions. Forecast growth in global refined zinc production in 2013 is expected to result in stocks increasing to 10.3 weeks of consumption.

Over the remainder of the outlook period, the price of zinc is projected to increase at an average annual rate of 5 per cent to average US$2588 (in 2013 dollars) in 2018. The price of zinc is projected to rise in response to an emerging imbalance in the underlying fundamentals of the zinc market. Global zinc consumption is projected to increase at an average annual rate of 5 per cent between 2014 and 2018. Over the same period refined zinc production is projected to grow at an average annual rate of 3 per cent. At these rates of growth the zinc market is expected approach balance by 2015 before moving into deficit from 2016. Over the second half of the outlook period, it is assumed that the global demand for zinc will be met by the drawing down stocks which are projected to decrease to 4 weeks of consumption, down from a peak of 11 weeks of consumption in 2014.

Figure 2: Annual zinc prices and stocks


Consumption

In 2012, world zinc consumption is estimated to have decreased by 3 per cent relative to 2011 to total 12.4 million tonnes. This decrease was evenly distributed between OECD European countries and China. European demand for zinc in 2012

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declined 7 per cent, relative to 2011, to total 2.4 million tonnes as on-going sovereign debt issues and austerity measures limited investment and manufacturing activity that supports zinc consumption. In China, a slowdown in economic growth in 2012 led to zinc consumption decreasing by 3 per cent in 2012, relative to 2011, to total 5.3 million as a result of lower Chinese production of refined zinc.

World zinc consumption is expected to return to growth in 2013, with demand forecast to increase by 6 per cent relative to 2012 and to total 13.1 million tonnes. China is expected to generate much of this growth. Announced spending on infrastructure projects and higher demand for consumer goods are forecast to support a 7.5 per cent increase in zinc consumption, relative to 2012, and to total 5.7 million tonnes. At this level of consumption, China alone will account for around 43 per cent of global zinc demand, almost doubling its share of the market relative to 2003 (see Figure 3).

In OECD economies, increased consumption in 2013 is forecast to come from the Republic of Korea as improving economic conditions in export markets, such as the US, increase the demand for zinc-intensive exports such as automobiles. In the US, a recovering economy and an improving housing market are forecast to result in a 2 per cent increase in zinc demand, relative to 2012, to total 918 000 tonnes.

Over the remainder of the outlook period (2014–2018) refined zinc consumption is projected to increase at an average annual rate of 5 per cent a year to total 16.8 million tonnes in 2018. Increased consumption of refined zinc is expected to be driven primarily by higher zinc demand in emerging economies. Within these economies, the building of infrastructure needed to support expansion of the industrial base requires zinc intensive materials.

Around half of all world zinc consumption occurs through galvanising, an anticorrosive coating for steel. Galvanised steel is extensively used in structural applications such as telecommunications and electricity infrastructure, housing, railways, and bridges. Zinc based alloys are also widely used in the manufacturing industry for the production of household appliances, electronics, and automobiles.

China’s consumption of refined zinc is projected to increase at an average annual rate of 8 per cent over the outlook period to total 8.2 million tonnes in 2018. Underpinning this growth are the central Government’s policy commitments in the 12th Five-Year plan (2011–2015) that include the expansion of its electricity and telecommunication distribution infrastructure, large scale construction of accommodation for low-income households in urban and rural areas, and initiatives to increase rail capacity by up to 30 000 kilometres by 2020.

Figure 3: Shares of world zinc consumption


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India’s consumption of refined zinc is projected to increase at an annual average rate of 6 per cent and to total 880 000 tonnes by 2018. Starting from a low base, this growth path will have India emerge as the world’s third largest consumer of zinc behind China and the US by 2018. Supporting this growth are expected expansions in India’s road and rail networks as well as investment to increase and modernise power generation and transmission infrastructure. Additionally, an emerging middle class in India will increase demand for other zinc intensive products such as automobiles and other consumer durables.

Zinc consumption in OECD economies is expected to grow at an annual average rate of around 3 per cent to total 5.3 million tonnes by 2018. In the US, zinc consumption is forecast to grow at an average annual rate of 3 per to total 1.1 million tonnes by 2018. This growth will be supported by assumed improved economic conditions that will increase the purchases of consumer durables as well as a recovery in the housing market. In the Republic of Korea, demand for zinc is forecast to increase at an average rate of 4 per cent per year to total 725 000 tonnes by 2018. In general, however, demand for zinc in OECD nations will increase at a lower rate than for emerging economies due to the already high existing level of zinc intensive infrastructure in developed economies.

Mine production

In 2012, world zinc mine production is estimated to have increased by 5 per cent, relative to 2011, to total 13.6 million tonnes. Much of this growth occurred in China where its mine production increased 14 per cent in 2012, relative to 2011, to total 4.9 million tonnes. In Canada, new mines commissioned in 2012, such as Hudbay Minerals’ Lalor mine (35 000 tonnes), Nyrstar’s Langlois mine (35 000 tonnes) and Trevali Mining’s Halfmile Lake (55 000 tonnes) offset declining production from existing mines.

In 2013, world zinc mine production is forecast to increase by 3 per cent relative to 2012 to total 14 million tonnes. The largest mines expected to commence operations in 2013 are Xstrata’s Bracemac-McLeod mine (90 000 tonnes) and Blackthorn Resources and Glencore’s Perkoa mine (95 000 tonnes) in Burkina Faso. There are a number of additional mines scheduled to start-up in 2013, although most are substantially smaller with production capacities of less than 50 000 tonnes per annum. Production will also be supported by mines which commenced in 2012 as they ramp up towards full capacity. Partially offsetting this growth will be the closure of Xstrata’s Brunswick and Perseverance mines in Canada which are both scheduled to cease operations in early 2013.

Over the remainder of the outlook period world zinc mine production is expected to increase at an average annual rate of 2.5 per cent to total 15.8 million tonnes by 2018. Higher production will be supported by new operations in a range of countries. In the Russian Federation, zinc mine production is expected to increase as a result of the development of East Siberian Metal’s Ozernoye mine (350 000 tonnes). This is the largest project which is expected to be completed over the outlook period. After declining in response to the closure of two large mines in 2013, Canada zinc

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production is expected to increase with the commissioning of new projects, including Xstrata’s Hackett River mine (250 000 tonnes), Canadian Zinc’s Prarie Creek mine (50 000 tonnes) and Chieftain Metals Tulsequah Chief mine (40 000 tonnes). In Australia, new production from MMG’s Dugald River (230 000 tonnes) and Xstrata’s McArthur River expansion (200 000 tonnes) are expected to offset the closure of MMG’s Century mine.

Offsetting the increased production from new mines are a number of closures of large zinc mines. Major zinc mines scheduled to close over the outlook period as their reserves are economically exhausted include MMG’s Century mine (500 000 tonnes) in Australia, Vedanta Resources’ Lisheen mine (170 000 tonnes) in Ireland and the Skorpion (170 000) mine in Namibia.

Refined production

In 2012 world refined zinc production is estimated to have fallen by 4 per cent, relative to 2011, and to total 12.7 million tonnes. Production was lower primarily as a result of a decrease in Chinese refined zinc production where smelters reduced production in response to weaker global demand for refined zinc. This is the first decrease in Chinese refined zinc production in over 20 years.

Refined zinc production is forecast to recover in 2013, increasing by 6 per cent to total 13.5 million tonnes. This will be supported by an expected increased utilisation rate in China as well as increased capacity due to the commissioning of new smelters. While much of the additional smelting capacity has occurred in China in recent years, in 2013 increased refined zinc production is expected in the US (160 000 tonnes), the Republic of Korea (180 000 tonnes) and Peru (80 000 tonnes).

Over the outlook period, world refined zinc production is projected to increase at an average annual rate of 3 per cent to total 15.9 million tonnes. The majority of this increased production is from new capacity that is expected to come from China which currently has over ten zinc smelter projects either currently committed or under consideration. Over the outlook period China’s share of world refined zinc production will increase from 38 per cent in 2012 to 41 per cent by 2013. Outside of China, increases in refinery capacity will tend to be the result of expansions to existing operations rather than from new smelters.

Australia

Australian zinc mine production in 2012–13 is forecast to decrease by 3 per cent relative to 2011–12 to total 1.5 million tonnes. This decrease can be attributed to recent zinc mine closures including Bass Metal’s Hellyer mine (25 000 tonnes) and Kagara’s Mt Garnet (40 000 tonnes) and Thalanga (15 000) mines. Reduced production from MMG’s Century mine due to a major scheduled maintenance outage will also contribute to lower domestic zinc production. These decreases are expected to outweigh production from new mines expected to ramp up production in 2012–13. These include CBH Resources’ Rasp mine (34 000 tonnes) as well as Xstrata’s Lady Loretta (126 000 tonnes) and George Fisher mines (64 000 tonnes).

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Consequently, Australia’s refined zinc production is forecast to remain virtually unchanged in 2012–13 at 504 000 tonnes.

In 2013–14, Australian zinc mine production is forecast to increase by 10 per cent to 1.7 million tonnes. New production is expected to come from the expansion of Xstrata’s McArthur River operation (200 000 tonnes) and additional production at Xstrata’s George Fisher and Lady Loretta mines.

Over the outlook period Australian zinc mine production is projected to peak in 2014–15 at 1.8 million tonnes. This level of production will be supported by new mines including TriAusMin’s Woodlawn operation (22 000 tonnes), YTC Resources’ Hera mine (10 000 tonnes) and by Xstrata’s McArthur River Phase 3 expansion when they reach full production levels. Australian zinc mine production is projected to decrease over the remainder of the outlook period due to MMG’s Century mine (500 000 tonnes) winding down production before ceasing operations in 2016–17. This decrease will be partially offset by new production by MMG’s Dugald River mine (200 000 tonnes) which is due to commence production in 2016. By 2017–18 Australian zinc mine production is forecast to be 1.6 million tonnes. Australian refined zinc production is projected to remain at around 504 000 tonnes as no major expansion or new refineries are scheduled to commence over the outlook period.

In 2012–13, Australian zinc exports (total metallic content) are forecast to decline by 7 per cent compared with 2011–12, to total 1.5 million tonnes, as the result of recent mine closures. Over the remainder of the outlook period, export volumes are projected to peak in 2014–15 at 1.8 million tonnes. By 2017–18 Australian exports of zinc are projected to total 1.6 million tonnes.

In 2012–13, Australian export earnings from zinc are expected to decrease by around 6 per cent, relative to 2011–12, to total $2.1 billion, as a result of lower domestic production. In 2017–18, Australian export earnings are projected to total $2.6 billion (in 2012–13 dollars) with projected substantially higher zinc prices sufficient to offset the effect of lower export volumes.

Figure 4: Australia’s zinc exports


Table 1: Zinc outlookunit 2011 2012 2013 f 2014 z 2015 z 2016 z 2017 z 2018 z

WorldProduction– mine kt 12948 13604 13959 14284 14820 15107 15438 15776– refined kt 13120 12660 13479 14065 14512 14894 15411 15905Consumption kt 12769 12394 13090 13674 14389 15153 15967 16825Closing stocks kt 1769 2195 2584 2975 3098 2839 2282 1362– weeks consumption wks 7.2 9.2 10.3 11.3 11.2 9.7 7.4 4.2

Price– nominal US$/t 2191 1947 1983 2031 2156 2388 2488 2750

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USc/lb 99 88 90 92 98 108 113 125– real b US$/t 2258 1984 1983 2011 2112 2309 2373 2588

USc/lb 102 90 90 91 96 105 108 117

2010–11

2011–12

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

2017–18 z

–11 –12 –13 –14 –15 –16 –17 –18Mine output kt 1479 1567 1522 1677 1845 1769 1711 1622Refined output kt 499 505 504 504 504 504 504 504Exports– ore and conc. c kt 2317 2382 2242 2571 2929 2769 2642 2453– refined kt 410 456 431 437 438 438 436 436– total metallic content kt 1494 1572 1480 1643 1812 1736 1675 1586

Total value– nominal A$m 2373 2292 2071 2400 2738 2847 2941 2967– real d A$m 2497 2358 2071 2332 2586 2613 2623 2572

b In 2013 US dollars. c Quantities refer to gross weight of all ores and concentrates. d In 2012–13 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABARES; Australian Bureau of Statistics; International Lead Zinc Study group.

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Resourcesand Energy

QuarterlyReviews

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An introduction to thermal coal markets

Ian Cronshaw

International trade in coal is embedded in global energy markets and industrial demand for products such as steel and cement. Globally, coal use is growing rapidly, and accounted for nearly half of incremental energy use in the last decade. Coal use has grown by 4.3 per cent per year since 2000, and provides about 28 per cent of the global energy supply, second only to oil. Globally, thermal coal use in 2011 accounted for three-quarters of total coal demand.

Thermal coal and power markets are closely linked

By far the most important use of thermal coal is power generation: in 2010, some 83 per cent of thermal coal use in OECD countries was in power production. In the US, around 90 per cent of coal use is in power production, accounting for just under half of power output in 2010. In non OECD countries, coal provides a similar proportion of power output, but is increasing.

A key to understanding thermal coal markets is that coal can be substituted by gas directly, and indirectly by alternative power sources such as nuclear and renewables. The short term dynamics of gas and coal competition are especially important because most other sources of power generation have relatively low variable costs, and are likely to be dispatched first, such as renewables, nuclear, and some hydro-electric power.

Most coal is used in countries outside the OECD, especially China

The second important factor in understanding global coal use is the importance of non OECD consumption. While in in terms of oil and gas, non OECD countries account for roughly half of energy use, for thermal coal the ratio is closer to three quarters, having grown from about half in the mid-1990s. Paramount in this growth in coal has been increases in both China and India. In absolute tonnage terms, Chinese thermal coal use was more than half global thermal coal consumption in 2011, having more than doubled since 2000, while India accounted for 10 per cent, having doubled since 2000 (see Figure 1). By comparison, the US, the largest OECD coal consumer, used some 15 per cent of global thermal coal output, its share having peaked at more than 21 per cent around 2005.

In the US, in the last two years, gas has increased its market share over coal in the power sector, to the point where for a few months in 2012, gas and coal supplied about equal amounts of power. By contrast, as recently as 2005, coal had provided over half US power needs, with gas at around 18 per cent. This is also true in most

The views expressed in this review are those of the author alone and are not necessarily those of the Bureau of Resources and Energy Economics, the Department of Resources, Energy and Tourism nor the International Energy Agency.

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OECD countries, where new generation has been dominated by gas over the last 15 years or so, with renewables also growing rapidly. However, the power sectors of India, and to a far greater extent China, have been dominated by massive building of new coal fired plant. Plants built over the last 10–15 years, or under construction, are likely to total some 800 GW even allowing for decommissioning of older, less efficient plant. By comparison, Australia’s coal capacity is 30 GW.

Figure 1: Coal consumption


Trade is a small part of global thermal coal use

Historically, seaborne and other international coal trade has made a relatively small contribution to total coal use. Nevertheless, seaborne thermal coal trade more than doubled between 2000 and 2011, reaching an estimated 791 million tonnes, or around 14 per cent of world thermal coal use in 2011 (see Figure 2). Three quarters of global coal trade is in thermal coal. In 2011, the largest thermal coal exporters were Indonesia (310 million tonnes), Australia (144 million tonnes) and the Russian Federation (110 million tonnes) (see Figure 3). Of particular interest is the rapid growth of thermal coal exports from the US; 2012 shipments are estimated at some 50 million tonnes, more than double 2010 levels.

Figure 2: Seaborne thermal coal trade


Figure 3: Thermal coal exporters


First Japan, then Korea entered the market as buyers; China and India have followed

On the import side, Japan has historically dominated both coking and later thermal coal imports. Japanese imports were the foundation of seaborne thermal coal trade, especially as its power sector rapidly diversified away from oil following the oil shocks of the 1970s. Thermal coal imports trebled from 1990 to 128 million tonnes in 2010. Korea has also doubled its thermal coal imports to 97 million tonnes over the period 2000–2011.

Beginning in early 2009, China has rapidly ramped up its thermal coal imports, to an estimated net 200 million tonnes in 2012, making it the world’s largest thermal coal importer. China had been a major exporter as recently as 2003 (see Figure 4). More than half of its thermal coal imports come from Indonesia. India also rapidly increased its imports, from 28 million tonnes in 2007 to 86 million tonnes in 2011,

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which look set to rise to around 101 million tonnes in the year ending March 2013. The speed and size of these changes in China and India have been a powerful dynamic in traded coal markets. Coupled with the sheer size of their total demand, both China and India are central to any analysis of global thermal coal markets. At current import levels they are respectively number 1 and 3 thermal coal buyers globally. Nevertheless, imports represent a relatively small part of total coal use, around 4 per cent and 14 per cent respectively in 2010. Consequently, even quite small changes in demand or supply, can have a large effect on import levels. As an illustration, a 1 per cent drop in coal demand in China, if met completely by reduced imports, would see imports decline by one fifth, or around 40 million tonnes, equivalent to more than half South Africa’s total exports. Given China’s efforts to slow its coal demand growth, China is by far the most significant source of uncertainty in any global coal trade projections.

Figure 4: China net thermal coal imports


Climate change policies

A key factor affecting future coal use and trade will be the effects of policies designed to reduce energy related carbon dioxide emissions. Effective policies aimed to mitigate anthropogenic greenhouse gas emissions must address energy based CO2 emissions from fossil fuel combustion, namely oil, gas and coal. In practice, oil use is increasingly concentrated in the transport sector, where, for the moment, substitution is difficult. In the case of gas, owing to its generally higher efficiency in use, plus lower emissions, most energy projections continue to see greater gas use, based around cheaper unconventional supplies. Stable or growing oil demand, plus higher gas use, require reductions in coal based emissions to achieve international emissions targets.

In the absence of technologies that actually reduce CO2 emissions from coal combustion, notably carbon capture and storage technologies, actual coal use will need to decline from projected levels, and in some forecasts declining in absolute terms. Indeed, most models show effective greenhouse gas control from the energy sector based on a combination of measures, including energy efficiency (especially targeted at power production and use), plus decarbonisation of the power sector through zero or low carbon power sources such as hydro, advanced renewables, nuclear, and greater use of high efficiency combined cycle gas, generally replacing older less efficient coal fired power plant.

So where is thermal trade headed?

While a number of global energy forecasts exist, including from the US Energy Information Administration (EIA), and large hydrocarbon companies such as BP, Shell and Exxon Mobil, those of the International Energy Agency (IEA) are amongst the most complete and respected globally. The IEA produces two coal forecasts annually,

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one covering the short to medium term outlook, extending out five years into the future, and its longer term outlook, the World Energy Outlook (WEO), to 2035. In the short term, both reports highlight the on-going growth in thermal coal use in all major markets, with the exception of the US, where cheap gas, currently priced at around one sixth the price of oil on an energy equivalent basis, is displacing coal in the power sector in a number of regions. Low US gas prices are also depressing world coal prices as US net coal exports have risen sharply.

Coal use continues to grow, but not as fast as in the last decade

In the IEA’s most recent medium term forecast (IEA 2012a), global coal use grows by around one sixth by 2017, driven by non OECD growth, with Chinese demand expected to grow by 25 per cent over that period, dominated by a near one third increase in coal demand from the power sector, largely based on increases in coal fired plant already under construction. This would take total coal use in China to around 4.6 billion tonnes. Nonetheless, this is a marked slowdown from the average 10 per cent per year growth over the first decade of the century, reflecting a consensus view amongst forecasters that the Chinese economy will slow somewhat over the next five years, and become less energy intensive. Energy efficiency and energy diversification policies, especially in the power sector, (nuclear, renewables and gas) can be expected to moderate thermal coal demand, the latter group of policies by around 500 million tonnes compared to a business as usual approach.

Coal demand from the Chinese power sector is expected to grow at only around 5 per cent per annum, as power demand in general slows from the breakneck speed of 63 per cent (around 1800 Twh) observed between 2005 and 2011. Non-power coal demand in China, which until recently was half of total coal demand (steel, coke, but also cement and chemicals and even household use) is also likely to moderate, as more modern energy sources such as gas increase penetration, and cement output slows. Indian thermal coal demand is projected to grow by some 36 per cent to 2017, based on rapid expansion of the coal fired fleet and increases in non-power use, especially cement. Coupled with on-going declines in US coal use, India should overtake the US to become the second largest coal user globally by 2017.

But coal trade still grows strongly….

The IEA projects that global seaborne coal trade will grow by around one quarter over 2011–17, with thermal coal accounting for three quarters of this trade throughout the forecast period. Growth in thermal coal export shipments at 4 per cent per annum, is a little slower than in the previous decade, when growth was nearer to 5 per cent. Before 2017, India is expected to overtake China as the biggest thermal coal importer, as its own mines will not be able to supply its increasing demand. According to the IEA, thermal coal imports are projected to more than double, and India accounts for more than half of incremental steam coal trade. India, China, Southeast Asia (Malaysia, Thailand, Philippines) and Chinese Taipei account for almost all the net growth in thermal coal import demand. In absolute terms, Indonesia and Australia each meet about one third of incremental thermal coal demand. Colombia will see a 30 per cent increase in thermal coal exports, with the

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US playing an increasing role as a thermal coal exporter. Depending on the evolution of freight rates, both Colombia and the US may become more prominent in Pacific markets.

…but is very sensitive to Chinese developments

The IEA evaluates the impact of Chinese coal demand on world markets by analysing a second scenario, based on slower Chinese economic growth of around 5 per cent per annum, compared to current levels nearer 8 per cent, and its current targeted levels of 7.5 per cent. Unsurprisingly, given China’s heavy reliance on coal and coal based power, this has a marked impact on coal use and import levels. Chinese coal demand growth is halved, with the power sector taking a major part of reduced demand, so that imports would fall to only around one-third of current levels. Global thermal coal trade growth is expected to be some 30 per cent lower over the period to 2017 compared with the base case, highlighting the sensitivity of global coal markets to the evolution of China’s energy sector. In general, low cost producers close to Asia (Indonesia and Australia) can expect to maintain strong shares of thermal coal export markets, while higher production and shipping cost suppliers will see their exports reduced.

Longer term is much more uncertain

The IEA produces annually longer term global energy projections in its World Energy Outlook (WEO) (IEA 2012b). The IEA bases its projections around three levels of Government policy intervention. The Current Policies Scenario (CPS) assumes no implementation of policies beyond those adopted by mid-2012. It corresponds loosely to the Reference Case of the EIA and the Business as Usual case adopted by private sector forecasters (eg BP and Shell). The IEA’s second and central policy case, the New Policies Scenario (NPS), takes into account existing policy commitments and announcements, cautiously implemented, in particular a more widespread carbon price after 2020. The third scenario, the 450 scenario, assumes policy action designed to limit global temperature increases to 2 degrees C, based on ultimate stabilisation of greenhouse gases in the atmosphere at 450 ppm CO2 equivalent.

In all scenarios, world energy demand grows over the forecast period, 2010–35, for CPS, NPS and 450 scenarios respectively, by 47 per cent, 35 per cent, and 16 per cent, with a generally increasing trend, although with obviously different growth rates. The corresponding growth rates for coal are respectively 59 per cent, 21 per cent, and for 450, a decline of 33 per cent from 2010 levels, back to levels last seen globally in the early 1990s.

The trajectories of coal demand growth differ markedly across the three scenarios. All cases show a roughly 15 per cent growth from 2010 to 2015–16, due to the inertia of existing and under construction power generation infrastructure. Thereafter, the three scenarios diverge. CPS, with the fastest coal demand growth, shows a moderation from 2000–10 growth rates after 2015, in keeping with the anticipated slowing of Chinese coal demand growth, so that compound annual average growth rate is less than half that observed over the last 11 years. In NPS,

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annual global coal demand growth averages only 0.9 per cent, with almost all growth concentrated in the period up to 2015. In the 450 scenario, coal use begins to decline soon after 2015, so that by 2035, coal use is below half that projected in CPS, a difference almost equal to total 2010 global coal use. In all three scenarios China, India and the US account for more than two thirds of global coal use, making policies in these countries pivotal in understanding coal markets and pricing, and coal based emissions.

Unsurprisingly, the impact on global coal trade in each of the three scenarios differs markedly. Thermal coal trade over the decade to 2020 is projected to grow by 65 per cent, 44 per cent, and 10 per cent in the CPS, NPS, and 450 scenarios respectively. For thermal coal trade post 2020, the differences become much greater. Australia, in the NPS, is projected to retain its dominance of non-thermal coal markets, although market share may fall somewhat from 2010 levels of 60per cent, even as tonnage actually increases. For thermal coal, tonnages to 2020 can be expected to rise by around 75 per cent, and Australia is anticipated to grow its share of global thermal coal markets from the current 20 per cent to nearer 30 per cent over the forecast period.

Conclusion

Coal use has grown rapidly since 2000, at a rate of 4.3 per cent per annum. The astonishing growth in the Chinese economy, the world’s largest energy user, and by far the biggest coal user, equal to half global coal demand, has been the major factor in this rise. Seaborne thermal coal trade has grown even faster than global coal use, more than doubling between 2000 and 2011, with only some signs of slowing in 2012.

Despite this recent growth in coal use, there is considerable uncertainty about future coal use and trade. These uncertainties include the possibility of a more marked slowing and also maturing in the Chinese economy. Equally important are climate change policies. If climate change mitigation policies are strongly implemented in line with the pledges made by developed and developing countries alike, this will have a larger and more negative impact on coal than on other fossil fuels, in the absence of carbon capture and storage type technologies.

References

International Energy Agency (IEA) 2012a. Coal Medium Term Market Report 2012

International Energy Agency (IEA) 2012b. World Energy Outlook 2012

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Nickel: a short history

Simon Cowling

Nickel, through its various uses, plays a large part in the development of capital infrastructure in economies worldwide. Due to its resistance to corrosion, nickel is primarily used in the production of stainless steel and alloys which are an integral ingredient for many infrastructure projects. To a lesser extent, nickel is also used in the production of nickel-metal hydride rechargeable batteries and electroplating other metals, such as steel for uses in construction and automotive purposes.

Australia is one of the largest nickel suppliers to the world market. The establishment of Australia’s nickel industry, however, has not been straight-forward and the industry has faced numerous challenges. The nickel market is characterised by extreme volatility evidenced by large and rapid swings in demand, production and, ultimately, prices. This review provides an overview of how key events in nickel markets since the 1960s have affected the development of Australia’s nickel industry.

The early days—pre-1965

The Australian nickel industry first emerged at the start of the 20th century with mining starting at the Zeehan field in western Tasmania in 1910. This followed the development of technologies that employed nickel as an alloying agent in steel towards the end of the 19th century (Mudd 2010) Between 1910 and 1938, approximately 568 tonnes of Nickel was intermittently produced from nickel copper sulphide ore extracted from the Five Mile group of mines in Tasmania (Mudd 2007). The small and scattered nature of the deposits made the mining and extraction of nickel challenging at Zeehan. Production at Zeehan field eventually became uneconomic and although world demand for steel alloys and nickel continued to grow, nickel operations ceased in 1938 (Mudd 2007).

World consumption grew by more than 130 per cent between 1953 and 1965 as the result of the increased use of steel in western economies (see Figure 1). As a result, the price of nickel trended upwards from the late 1940s to the mid 1970s (see Figure 2).

Figure 1: World refined consumption—1950 to 2012


The views expressed in this review are those of the author alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.

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Figure 2: Nickel price and major nickel events—1950 to 1990


Boom time—1966 to mid-1970s

Demand for nickel during the 1960s and early-1970s was driven by the steel consumption demand associated with robust economic growth and investment in fixed capital in Japan, Europe and the US. For example, Japan’s Gross Domestic Product grew by around 10 per cent each year during the 1960s. Consumption of steel in the US was also driven by the manufacturing of steel-intensive military equipment used in the Vietnam War.

Increased global demand for nickel supported Australia’s nickel industry which established itself after a number of years of exploration. The first major event of this period was the discovery by the Western Mining Company (WMC) of a substantial nickel sulphide ore deposit at Kambalda, near Kalgoorlie in Western Australia in 1966. The discovery signalled the start of a period of rapid growth in Australia’s nickel industry that coincided with a rapid increase in the price of nickel (see Figure 2). Between 1967 and 1973 Australian nickel production increased more than 1 400 per cent, from 2 600 tonnes in 1967 to over 40 000 tonnes in 1973. Although global production also increased over this period, strong growth in demand and rising production costs caused the price to rise (in 2013 dollars) from US$13 500 at the end of 1966 to a peak of US$17 600 in 1974.

Figure 3: Australia’s refined and mine production—1967 to 2012


The discovery at Kambalda by WMC initiated a ‘rush’ in base metal and nickel exploration in Australia, primarily focussed within Western Australia. Expenditure on nickel exploration prior to the Kambalda discovery was 2 per cent of total base metals exploration expenditure, or 1.5 per cent of total minerals exploration. This increased to more than 55 per cent of total base metals exploration and over 30 per cent of total expenditure on minerals exploration in 1970 (Jacques et al. 2005). This equates to approximately $485 million worth of exploration expenditure in 2013 dollars (Jacques et al. 2005).

A number of large deposits in Australia that would contribute to nickel production in the coming decades were discovered during this first nickel boom. Of the known global resources of nickel sulphide, more than 90 per cent were discovered during the period of 1966 to 1973 (Hoatson et al. 2006). Significant deposits in Australia that were discovered during this period included: Mt Keith; Perseverance; Yakabindie; and Honeymoon Well. All of these deposits are located in Western Australia.

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In 1966, Canada was one of the major producers of nickel in the world. The rapid development of the nickel industry in Australia during the ‘boom’ of the 1960s coincided with protracted labour strikes in Canada between 1966 and 1969. Due to the labour strikes, WMC was able to establish itself in the global nickel market with the Kambalda mine and ensure it became a successful and profitable operation (Mudd 2007). Profits were boosted by an increase in nickel prices and over this period Australian production of nickel ore increased by 400 per cent, to total 11 200 tonnes in 1969 (see Figure 3). World mine production during this period grew by 23 per cent (see Figure 4).

The rocky years—mid-1970s to early 1990s

Following the first oil shock in 1973 there was a global slowdown in the nickel market that lasted for about two decades covering the period 1975 to 1987. During this time depressed global prices, for nearly all metals, led to a substantial decline in exploration activity. The higher levels of world economic growth during the 1960s had, for the most part, come to an end. Economic growth and investment in the US, Japan, Europe and Australia all slowed during the 1970s. The end of the Vietnam War also led to a downturn in steel used in manufacturing military materiel and contributed to a drop in the demand for nickel.

Between 1975 and 1987, Australia produced between 75 000 to 85 000 tonnes of contained nickel per year. In 1987, global stocks of nickel fell to 92 000 tonnes (5.3 weeks consumption), less than half the level of world stocks of 202 000 tonnes at the end of 1982 (14.5 weeks consumption) (see Figure 5). A reduction in nickel production capacity, caused by closures of high energy consuming operations started in the early 1970s (Ashok et al. 2004). Prices increased from US$9900 per tonne (2013 dollars) in 1987 to US$27 800 per tonne in 1988. As a result, the value of Australian nickel exports over the five years starting in 1988 increased despite a decline in the production of Australian nickel.

Figure 4: World refined and mine production—1950 to 2012


Figure 5: World nickel stocks—1975 to 2012


An abrupt decline in the discovery of new nickel deposits during the ‘rocky years’ affected the available global nickel supply. Very few major deposits were discovered in Australia between 1975 and 1987, although previously identified resources within Australia were able to sustain Australian production during this period. Technological advancements in processing nickel laterite ore, such as high pressure acid leaching (HPAL) and electric furnaces, were able to contribute to an increase in production capacity. These advances made the complex process of production of nickel from

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laterite ore more economically viable. The processing of nickel laterites has historically been more expensive compared to nickel sulphides, although mining nickel sulphide ores can be more capital intensive due to deposit depths. Australia’s nickel focus has predominantly been on the production and export of nickel derived from nickel sulphides due to the greater abundance of nickel sulphide resources. These technological advancements meant that some previously discovered, but uneconomic, resources could be extracted profitably.

Bigger, higher, longer—early 1990s to 2008

Beginning in the early 1990s the nickel industry in Australia underwent an expansion that could be characterised as the ‘second’ nickel boom. This was driven by a number of global factors. The emergence of China as an economic superpower in the 1990s and 2000s coincided with a surge in fixed asset investment on steel-intensive infrastructure projects and resulted in higher demand for nickel. Refined nickel consumption in China grew by more than 900 per cent between 1990 and 2008. This increase in consumption encouraged investment and the opening of new mines, both in Australia and globally.

World nickel prices began to rise steadily from the late 1990s and continued into the 2000s (see Figure 6), with global production reaching more than 1.5 million tonnes by the end of 2006. As a consequence of both higher prices and production, Australian nickel export values peaked in 2007 at a value of $8.1 billion (2013 dollars), with 211 000 tonnes exported (see Figure 7).

Figure 6: Nickel prices and major Nickel events—1991 to 2012


Figure 7: Australia’s export volumes and values—1990 to 2012


The second nickel boom, in part, was supported by further development of high pressure acid leaching (HPAL) technology in the early 1990s. High pressure acid leaching is associated with lower grade nickel laterite ores that were historically more difficult and expensive to process. The outcome of this leaching process is an intermediate product for further refining which is rich in nickel. During the first nickel boom, initial nickel ore discoveries were of a high grade and contained approximately 4 per cent nickel (Mudd 2007). Ore grades have been gradually, but steadily, in decline since this time. One of the drivers influencing this decline is the increasing extraction of nickel from lateritic ores. In the late 1990s, three new laterite projects were developed in Western Australia based on HPAL technology.

Base metal exploration expenditure also increased during the second nickel boom to levels comparable to the first nickel boom of the late 1960s. For instance, exploration expenditure in Australia increased 400 per cent from FY1992 to FY2008

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(in 2013 dollars). This was driven by increased global prices for nickel and the expectation of strong consumption demand continuing into the future.

Large amounts of capital were injected into nickel mine developments in Australia. One of the largest of these was at Nickel West’s Ravensthorpe mine in Western Australia. This investment included a nickel and cobalt processing plant worth more than US$1.3 billion in 2013 dollars.

A number of mines started or increased production following the upswing in prices in the 2000s. The mines, all located in Western Australia, included Murrin Murrin, Mt Keith, Silver Swan, Cosmos, Emily Ann, and the re-opening of Kambalda. The conversion of previously sub-economic resources to economic resources was a direct result of the upturn in the Australian nickel market. In addition, the on-going development of HPAL technology was a contributing factor as it made previously discovered, but uneconomic deposits, such as Murrin Murrin, economically viable.

World nickel price and production reached an historical high in 2007 and peaked at US$61 300 per tonne in 2013 dollars on 16 May 2007. World nickel production in that year also reached, a then record high, of 1.6 million tonnes.

The peak of the boom in 2007 was largely driven by demand growth underpinned by robust economic growth in China, and moderate growth in the US and Europe. Emerging economies, especially China, experienced substantial increases in economic growth that increased the need for infrastructure and stainless steel. Another key factor explaining the historically high prices of 2007 was the existence of supply constraints. In particular, world stocks were below 150 000 tonnes from 1999 through to 2008. In response to these higher prices and reduced stocks, China responded by increasing its use of ‘nickel pig iron’.

Nickel pig iron (NPI) I is a form of pig iron that is produced by smelting iron-rich, low grade nickel ores, often from nickel laterite. NPI is commonly produced in two varieties, a low nickel variety with between 4–6 per cent nickel and a high nickel variety containing 8–13 per cent nickel. This compares to conventionally produced ferronickel which is between 25–40 per cent nickel. The use of laterite ore provides a cheaper alternative to using the more expensive ferronickel and refined nickel inputs. The rise of the NPI industry in China has allowed some exporting countries to sell nickel ore without the need to build capital intensive refining facilities and has boosted exports from Indonesia, the Philippines and New Caledonia.

The increase in the use of NPI has had a substantial impact on the Australian nickel industry. With the emergence of NPI as a substitute for ferronickel and refined nickel in stainless steel making in China, demand for Australian refined nickel reduced.

Peak nickel—2008 and 2009

The price and production prices of early 2000s were driven by a relative shortage of global nickel supply. By 2007 global mine production peaked at 1.6 million tonnes

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and the nickel price peaked at around $62 000 per tonne (2013 US dollars) in May of that year.

As a result of the global financial crisis (GFC), economic growth declined was and became negative in key industrialised countries. Demand for stainless steel and nickel fell and resulted in nickel prices decreasing by more than 40 per cent from 2007 to 2008, with a further decline of over 30 per cent from 2008 to 2009. Numerous mine closures occurred, such as Cawse and Black Swan within Australia, as a direct result of the fall in nickel prices. In 2009, Nickel West announced that production at the Ravensthorpe mine would be suspended indefinitely and the site would be placed on care and maintenance. Similarly, Norlisk suspended operations at its four mines in 2009 due to very low nickel prices. In 2011, Norlisk restarted production at the Maggie Hays mine near Lake Johnson in Western Australia.

Nickel, back to stay?—Post 2009

The price trough for nickel continued through most of 2009, with prices averaging around $16 000 a tonne for the year, in 2013 US dollars (see Figure 5). The price falls led to the total value of Australia’s nickel exports falling by 6.5 per cent in 2009 compared with 2008 (see Figure 7), despite increased export volumes. At the start of 2010, global stocks of nickel were at a 10-year high of 234 000 tonnes, or around 10 weeks of consumption.

Since 2009 the nickel market has experienced a steady increase in prices and world refined nickel consumption grew 19 per cent and 8 per cent in 2010 and 2011, respectively. The effects of the euro zone crisis in 2012 reversed the steady increases in prices since late 2009. In 2012, refined nickel consumption increased by 3 per cent, although the average price was 26 per cent lower than in 2011 at $17,200 (2013 dollars). Both global and Australian nickel production increased in 2012, with nickel sulphide ores accounting for around 40 per cent of known nickel resources worldwide, with laterite ores accounting for the remaining 60 per cent (USGS, 2013).

Projected growth in emerging economies should support higher world consumption of nickel. However, fluctuating demand and price volatility are likely to continue characterising the nickel market in the future.

References

Dalvi, A. D., Bacon, W. G., & Osborne, R. C. (2004). The Past and Future of Nickel Laterites. PDAC 2004 International Convention (p. 27). Toronto, Ontario, Canada: Prospectors and Developers Association of Canada.

Hoatson, D. M., Jaireth, S., & Jaques, A. L. (2006). Nickel sulfide deposits in Australia: characteristics, resources, and potential. Ore Geology Reviews, 29, 177-241.

Mudd, G. M. (2007). An analysis of historic production trends in Australian base metal mining. Ore Geology Reviews, 32, 227-261.

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Mudd, G. M. (2010). Global trends and environmental issues in nickel mining: Sulfides versus laterites. Ore Geology Reviews, 38, 9-26.

U.S. Geological Survey. (2013). Mineral Commodity Summaries, January 2013. U.S. Geological Survey.

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Biofuels: An overview

Alan Bartmanovich

Background

Biofuels are liquid fuels, such as ethanol, that are derived from biomass. In 1826, Samuel Morey used ethanol in the first American internal combustion engine prototype. In 1896, Henry Ford designed his first car, the ‘Quadricycle’ to run on pure ethanol. In 1908, the ‘revolutionary’ Model T Ford was capable of running on ethanol, gasoline or any combination of those fuels. Rudolf Diesel, who designed the original diesel engine, had it run on peanut oil and was quoted as saying at the time; ‘The diesel engine would help considerably in the development of agriculture of the countries which use it’ (Kovarik). Due to the low cost of petroleum at the time, however, the diesel engine was modified to run on petroleum derived fuel.

Power ethanol was used in Australia from 1927 until after the end of World War 2. The Australian National Power Alcohol Company, built in Sarina, Queensland, started with a capacity of two million gallons per year and produced ethanol from molasses, along with cassava (manioc) and sweet potatoes grown in rotation with sugarcane. The use of power alcohol was mostly confined to Queensland, but the Motor Spirits Vendors Act of 1933, mandated that ethanol be blended with petrol. Shell Oil Co. marketed ‘Shellkol’ fuel which was a 15-35 per cent blend in petrol during this time (Kovarik).

Australian overview

Australia has developed a growing reliance on petroleum fuels that are increasingly imported, either as crude oil for local refining or as finished fuel products.

In terms of biofuels, Australia has a number of natural advantages for increased biofuel production including: substantial agricultural and forestry biomass resources; marginal land suitable for energy crops; a high number of sunshine days; and a relatively well developed rural infrastructure that could support new industries. The availability of adequate water resources to support biomass crops, however, is a limiting factor in some geographic areas.

The potential benefits to Australia from growing biofuel production include increased domestic supply security for fuels, enhanced regional development opportunities and the potential for the reduction of Australia’s carbon footprint with the direct reduction of fossil fuel consumption.

Commercial production of Australian biofuels in 2012 was limited to fuel ethanol fermented from wheat, sorghum and c-grade molasses and biodiesel from processed The views expressed in this review are those of the author alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.

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waste materials such as used cooking oil and tallow. Fuel ethanol is supplied as a 10 per cent ethanol blend in petrol (E10), with some limited volumes of E85 (i.e. blend of 85 per cent ethanol by volume in petrol), while biodiesel is sold as a maximum 5 per cent blend in diesel fuel (i.e. B5).

Overseas developments

Brazil

Brazil is a pioneer in the commercial production of biofuels. Fuel ethanol, for example, has been mandated for inclusion in Brazilian motor gasoline at the rate of 5 per cent by volume as far back as 1931. After the oil price shocks of the 1970s, Brazil launched its National Alcohol Program which focussed on increasing the production of ethanol from sugar cane.

Fuel ethanol is now a major component of the Brazilian liquid fuel mix, with 440 ethanol production facilities in operation. All motor gasoline sold in the country since 1993 has been blended with 18–25 per cent ethanol. In 2011, Brazilian consumption of fuel ethanol was over 19 billion litres which accounted for some 35 per cent of the total national gasoline demand of 55 billion litres (Giles & Barros, 2012).

Car manufacturers in Brazil have developed flexible fuel (flex-fuel) capability for vehicles to accept any blend of ethanol and gasoline up to 100 per cent ethanol, which is sold as a fuel option in most retail petrol stations. In 2011, over half of the Brazilian light vehicle fleet was flex-fuel capable and this is expected to grow to 80 per cent by 2019 (Giles & Barros, 2012), with 90 per cent of Brazil’s new passenger vehicles sold having flex-fuel capability.

Brazil has also developed commercial production of biodiesel, over 80 per cent of which is based on soybeans (Aziz Elbehri; Anna Segerstedt; Pascal Liu, 2013). Brazilian biodiesel production in 2012 was 2.6 billion litres and accounted for about 5 per cent of the total national diesel fuel demand.

Figure 1: Biofuels 2011 market shares in selected countries


Figure 1 shows that Brazil is the world leader in terms of the adoption of biofuels as a substitute for conventional petroleum based fuels. By comparison to both Brazil and the USA, Australia has an underdeveloped biofuels industry.

The US

The US Environmental Protection Agency (EPA) is responsible for developing and implementing regulations to ensure that transportation fuels sold in the US contains a minimum volume of renewable fuel. The Energy Policy Act (EPAct) of 2005 established the Renewable Fuel Standard (RFS) program and required that 7.5 billion gallons (28 billion litres) of renewable fuel be blended into gasoline by 2012. In 2007

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the Energy Independence and Security Act (EISA) further expanded the RFS program to:

include diesel fuel, in addition to gasoline;

increase the volume of renewable fuel required to be blended into transportation fuel from 9 billion gallons (34 billion litres) in 2008 to 36 billion gallons (136 billion litres) by 2022;

establish new categories of renewable fuel, and set separate volume requirements for each one;

require the EPA to apply lifecycle greenhouse gas performance threshold standards to ensure that each category of renewable fuel emits fewer greenhouse gases than the petroleum fuel it replaces.

In 2010, 98 per cent of the biofuel consumption of 48 billion litres in the USA was bioethanol (EIA, 2013), with corn derived ethanol comprising the vast majority. This will change over time, however, because the RFS requires that a growing proportion of renewable fuels will need to be advanced biofuel feedstock and technologies

Most US cars are able to run on a 10 per cent ethanol blend in motor gasoline (E10) and in 2011 there were up to 10 million flex-fuel vehicles in America (Motavalli, 2012) capable of running on much higher ethanol blended fuels such as E85.

The EU

Under Directive 2003/30/EC on the promotion of the use of biofuels or other renewable fuels for transport, the EU established the goal of reaching a 5.75 per cent share of renewable energy in the transport sector by 2010.

Under Directive 2009/28/EC on the promotion of the use of energy from renewable sources this share rises to a minimum 10 per cent in every Member State in 2020. This directive aims to ensure the use of sustainable biofuels only, which generates a clear and net GHG saving without a negative impact on biodiversity and land use (European Commission).

In its biofuels implementation strategy, the European Commission has a threefold objective: (1) further promotion of biofuels in the EU and in developing countries; (2) preparedness for large-scale use of biofuels, and (3) heightened cooperation with developing countries in the sustainable production of biofuels. These three objectives comprise seven policy areas, as follows:

to stimulate demand for biofuels, stressing the importance of national targets, biofuel use obligations and ensuring sustainable production of biofuels. The European Commission will also pay particular attention to the tax benefits and the possible establishment of a regulatory framework for incentives linked to the environmental performance of individual fuels, will encourage the use of biofuels in public and private vehicle fleets and is proposing to formally promote the use of clean vehicles for road transport.

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ensuring environmental benefits in terms of reducing emissions of greenhouse gases, guarantee that feedstock for biofuels is produced in a sustainable manner, both in the EU and in third countries, particularly with regard to the protection of biodiversity, water pollution, soil degradation and the protection of habitats and species and ensure the compatibility of technical and environmental regulations.

developing the production and distribution of biofuels, considering the opportunities offered by biofuels in terms of economic activity and job creation within the context of the cohesion policy and rural development policy. Industries are to justify their use of practices that act as barriers to the introduction of biofuels to ensure that there is no discrimination against biofuels.

expand feedstock supplies to ensure sustainable production of biofuels, by including sugar production for the manufacture of bioethanol aid schemes. In addition, the European Commission will study the possibility of processing cereals from existing stocks into biofuels, finance a campaign to inform farmers and forest operators, bring forward a Forestry Action Plan and examine the possibility of using animal by-products and waste as energy sources.

enhance the trade opportunities of biofuels, by establishing separate customs codes for biofuels and pursuing a balanced approach to trade negotiations with ethanol-producing countries in order to ensure sustainable development of European production and imports of biofuels, and to amend the standard for biodiesel as required.

support developing countries with potential in terms of biofuels, particularly by means of accompanying measures for countries affected by EU sugar reform, a specific aid program for biofuels, and a framework for effective cooperation that would include, among other developments, the establishment of national biofuel platforms and regional biofuel action plans.

support research and innovation, particularly in order to improve production processes and to lower costs. The principal measures will focus on continuing support for Research and Development, the full use of second generation biomass and biofuels (i.e. originating from the processing of lignocellulosic feedstock such as straw and forest residues).

Source: Europa.

Biofuels issues, technologies and feedstocks

The Food versus Fuel debate

The increased production of biofuels has been recognised as carrying some risk to world food supply security if the feedstocks that are used to produce it are diverted from food supplies or if they are grown on land, or utilise labour or water (Aziz Elbehri; Anna Segerstedt; Pascal Liu, 2013) that could otherwise be used for food production.

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Traditional feedstock for fuel ethanol in Brazil, for example, is sugar. Producers are able to readily switch between sugar production and ethanol, depending on market economics. In the USA, however, a majority of fuel ethanol is produced from corn.

Increasingly, the focus is on developing second and next generation technologies to produce advanced biofuels that do not rely on food related feedstock, and can be grown on otherwise marginal land and not adversely impact the supply of potable water where it is a scarce resource.

Biofuels feedstocks

Biofuels technologies that rely on food related biomass such as sugar, corn, wheat or other edible crops have traditionally been referred to as first generation technologies.

Traditional biodiesel feedstocks that include used cooking oil and animal derived tallow are considered to be conventional feedstocks even though their use in producing biofuels has minimal or no direct impact on food resources as they are essentially industrial by-products.

Advanced biofuels are those that do not compete with food stocks for their production and these include lignocellulosic short rotation crops, agricultural or forestry residues, non-edible seed oils, purpose grown algae and municipal waste materials.

Biofuel technologies do not always produce fuel-ready products, but often produce an intermediate product that is best described as ‘biocrude oil’, which is analogous to petroleum crude oil. In some cases, this biocrude can be a ‘drop-in’ replacement for petroleum crude and, therefore, is suitable for direct injection into traditional petroleum reefing processes. Some biocrudes, however, may need to be pre-processed to make them suitable as crude oil replacements, thus adding to their cost of production.

A number of biocrude oils may actually be more valuable than their petroleum counterparts in the sense that they could yield higher value products such as valuable by-products or, depending on their physical composition, they could potentially produce higher yields of valuable transport fuels than petroleum.

Some promising biofuel technologies that are especially relevant to Australian conditions include:

Super critical catalysed water processing – for production of high energy drop-in biocrude;

Pyrolysis—for processing of forestry and agriculture residues;

Efficient yeast based conversion of lignocellulosic materials to ethanol, with animal and/or fish feed by-products;

Bio-fermentation for conversion of waste industrial gases; and

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Biocrude conversion processes to fuels through purpose built bio-refineries

Australian second generation biofuels research and development

In 2009, the Australian Government announced the Second Generation Research and Development (Gen 2) Program which provided financial support of $15 million for seven individual projects ranging from $1.24 to $2.724 million each to develop a number of potential second generation biofuel technologies.

The projects selected for Gen 2 program funding were:

Algal Fuels Consortium / South Australian Research and Development Corporation

o A pilot-scale second-generation biorefinery for sustainable microalgal biofuels and value add products.

Bureau of Sugar Research Stations (BSES) Limited

o Cane2Fuel: Developing an optimised and sustainable sugarcane biomass input system for the production of second generation biofuels.

Curtin University of Technology

o Sustainable production of high-quality second generation transport fuels from mallee biomass by pyrolysis and biorefinery.

Licella Pty Ltd

o Commercial demonstration of lignocellulosics to (unique) stable biocrude oil

Microbiogen Pty Ltd

o Second Generation Biorefinery – Conversion of sugarcane into fuel and feed project

Monash University / Renewable Oil Corporation

o A second generation pyrolysis biorefinery

University of Melbourne

o Biofuel from Microalgae: Efficient separation, processing and utilisation of algal biomass.

Five of the seven Gen 2 projects proceeded to successful completion by mid-2012, significantly increasing the Australian knowledge base in this industry and providing important foundations for future work and in some cases, pre-commercial project developments.

Australian advanced biofuels research projects

In the 2011–12 Budget, the Australian Government committed $20 million to undertake research into advanced biofuels in Australia. The stated goal is to progress the deployment of pre-commercial demonstration projects for the production of high energy, ‘drop-in’ advanced biofuels in Australia. Three projects have been funded to date, including:

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James Cook University received a $5 million Foundation Grant for its $11 million High Energy Algal Fuels project, which is being undertaken in partnership the Advanced Manufacturing CRC Ltd (AMCRC) and MBD Energy Ltd. The project is expected to develop and demonstrate the innovative and effective use of macroalgal biomass for the generation of high energy biocrude that can form a future base for the production of fuels for use in the aviation, mining and marine industries.

Licella Pty Ltd, which opened its Australian Government supported Commercial Demonstration Plant in 2011 under the Gen 2 Program, was granted $5.4 million in funding to undertake a $8.2 million feasibility study into the construction of its first pre-commercial biofuels plant. If constructed, it is estimated that the plant could produce 125,000 barrels of bio-crude oil per annum, which could be used to produce a drop in fuel for the aviation industry.

Muradel Pty Ltd plans to use $4.4 million of funding toward a $10.7 million project up scaling its marine algal production and harvesting technology from pilot to demonstration size near Whyalla, South Australia. The technology has the potential to become sustainable green crude for the existing petroleum industry and to provide fuel for aviation.

Conclusion

Biofuels production is growing worldwide as part of a global push towards renewable forms of energy. Advanced biofuels technologies are being developed both internationally and in Australia, which will likely increase the production of biofuels. Countries such as Brazil and USA and also in Europe are already driving their vehicles on locally produced biofuels while at the same time developing new, more efficient and economically sustainable technologies.

Australia could grow an increasing portion of its own liquid transport fuel. Fermentation of fuel ethanol from the sugarcane and starch yielding crops is a proven and successful technology. Oil producing seed crops can easily be converted into biofuel. A sophisticated Australian agricultural sector exists that has the potential to grow new and innovative energy crops for fuel ethanol or ‘drop-in’ high energy biofuels. Forestry residues and purpose grown vegetation such as salinity controlling mallee trees in wheat fields, could also be harvested for biofuel production. Finally, Algae has the technical potential to convert abundant Australian sunshine, brackish water resources and carbon dioxide into a diesel or jet fuel substitute, often yielding high value by-products in the process.

References

Aziz Elbehri; Anna Segerstedt; Pascal Liu. (2013). Biofuel and the Sustainability Challenge. Food and Agriculture Orgainisation of the United Nations, Trade and Markets Division. Rome: Food and Agriculture Orgainisation of the United Nations.

EIA, U. (2013). Alternative energy data . Retrieved March 7, 2013, from US Energy Information Administration: http://www.eia.gov/renewable/data.cfm#alternative

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Europa . (n.d.). Europa Legislation Summaries. Retrieved March 8, 2013, from Europa: http://europa.eu/legislation_summaries/energy/renewable_energy/l28175_en.htm

European Commission. (n.d.). European Commission Renewable Energy. Retrieved March 8, 2013, from European Commission: http://ec.europa.eu/energy/renewables/biofuels/biofuels_en.htm

Giles, F., & Barros, S. (2012). Global Agricultural Information Network Annual Report. Sao Paulo: USDA Foreign Agricultural Service.

Kovarik, B. (n.d.). http://www.environmentalhistory.org/brilliant/bioenergy/international/. Retrieved March 4, 2013, from Brilliant - Exploring the history of sutainable energy.

LEK Consulting. (2011). Advanced Biofuels Study . Canberra :

Department of Resources, Energy and Tourism.

Motavalli, J. (2012, march 1). Flex-Fuel Amendment Makes for Strange Bedfellows. The New York Times.

US-EPA. (n.d.). Renewable fuels. Retrieved March 7, 2013, from US Environmental Protection Agency: http://www.epa.gov/otaq/fuels/renewablefuels/index.htm

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Resourcesand Energy

Quarterly

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Statistical tablesContribution to GDP

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Principal markets for Australian imports in 2011–12 dollars


Principal markets for Australian exports in 2011–12 dollars


Resources and energy sector indicators, Australia


Principal markets for Australian resources and energy exports


Resources and energy prices, ended March Quarter 2013

Please refer to pages 138–139 of the Resources and Energy Quarterly – March quarter 2013 PDF version.

Tables 1–3

Please refer to the corresponding Excel sheets of the Resources and Energy Quarterly – March quarter 2013 Statistical data Excel workbook.

Table 3: Contribution to exports by sector, balance of payments basis


Tables 4–42:

Please refer to the corresponding Excel sheets of the Resources and Energy Quarterly – March quarter 2013 Statistical data Excel workbook.

BREE contacts

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Executive Director/Chief

Economist – BREE

Quentin Grafton [email protected]

(02) 6243 7483

Deputy Chief Economist/Research

Director

Roger Rose [email protected]

(02) 6243 7583

Resources Program – Program

Leader

John Barber [email protected]

(02) 6243 7988

Modelling & Policy Integration –

Program Leader

Arif Syed [email protected]

(02) 6243 7504

Energy and Quantitative Analysis –

Program Leader

Nhu Che [email protected]

(02) 6243 7539

Data & Statistics Program –

Program Leader

Geoff Armitage [email protected]

(02) 6243 7510

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