Outlook for Bulk Commodities John Barber Bureau of Resources and Energy Economics bree.gov.au
Overview Outlook for China Steel and iron ore markets Electricity and thermal coal
China s economy is still growing, albeit at lower rates. Investment remains a key driver of economic growth. Quarterly contribution to China s GDP growth 14 12 10 8 6 4 %ytd 2-2 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 final consumption expenditure gross capital formation net exports Source: CEIC.
All forms of steel intensive investment are still growing, but at lower rates. Growth in China s fixed asset investment 25 20 15 10 5 %ytd Manufacturing Railways Real estate Source: CEIC. Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Housing construction accounts for 30% of steel in China, in 2014 it has dropped after a tightening of credit availability. China s residential sales and starts 120 100 80 60 40 Iron ore price dropped below US$90 per tonne Iron ore price dropped below US$90 per tonne Iron ore price dropped below US$90 per tonne 20 %yr -20-40 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Starts Sales Data is three month moving average of monthly growth rate. Source: CEIC. bree.gov.au
China s steel production is increasing, but consumption in 2014 is down. China steel production 240 200 160 120 80 40 Mt Source: CEIC. Mar 10 Dec 10 Sep 11 Jun 12 Mar 13 Dec 13 Crude steel production Trend bree.gov.au
And China s steel industry is not performing well. China steel industry profitability Million RMB 14000 12000 10000 8000 6000 4000 2000-2000 -4000 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 70 60 50 40 30 20 10 % -10-20 Monthly industry profit % loss making firms (rhs) Source: CEIC. bree.gov.au
Looking forward -highly populated emerging economies are still urbanising and growing. Relationship between urbanisation and GDP per capita 60000 GDP per capita (ppp basis, current price) 50000 40000 30000 20000 10000 India China USA Australia Sources: World Bank, IMF 30 40 50 60 70 80 90 100 % urban population
Most emerging economies are yet to reach peak steel use. Peak steel intensity since 1970 1400 1200 Korea 2008 Consumption per capita (kg) 1000 800 600 400 200 Vietnam 2013 China 2013 Thailand 2013 United States 1973 Japan 1990 Germany 2007 India 2013 Sources: World Bank, World Steel Association 5 10 15 20 25 30 35 40 GDP per capita (US$)
Intra-city transport systems remain under-developed in China. Rail Transport Systems in metropolitan Centres 240 200 160 120 80 40 km per million people Source: RBA bree.gov.au
China s iron ore imports are increasing, so is Australia s market share China iron ore import volumes 90 75 60 45 30 15 Mt Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Australia Brazil other Source: Bloomberg.
Growth in imports is resulting in higher iron ore inventories though China port inventories 120 100 80 60 40 20 Mt Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Source: Bloomberg.
And resulted in lower prices. Iron ore prices cycles are common, but the trend is clearly for lower prices. Iron ore price cycle 200 160 120 80 US$/t 40 Previous Ports Australia conference Source: Bloomberg Jan 09 Oct 09 Jul 10 Apr 11 Jan 12 Oct 12 Jul 13 Apr 14
Lower prices, but Australia s iron ore production will continue to grow. Australia annual iron ore production 1000 800 600 400 200 Mt 1995 1998 2001 2004 2007 2010 2013 2016 z 2019z Sources: Company Reports; BREE.
But growth in metallurgical coal exports will slow, most large scale projects are complete. Australia s metallurgical coal production 200 160 120 80 40 Mt 1998-99 2002-03 2006-07 2010-11 2014-15 2018-19 Source: BREE; Coal Services; company reports.
Thermal coal prices have been declining prior to China s recent standards policy and tariffs. Thermal coal spot prices 180 160 140 120 100 US$/t 80 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Source: Bloomberg. Newcastle 6000kcal Richard's Bay 6000kcal QHD 5800kcal
Prices reflect oversupply rather than lower demand. Trade has almost doubled since the GFC, China s production up too. Major thermal coal exporters 1000 800 600 400 200 Mt 1999 2003 2007 2011 2015 2019 Sources: BREE; IEA. South Africa Colombia Russia Australia Indonesia
Export market balance is unsustainable, too many producers are loss making. JFY contract price Current spot price
China s domestic industry is facing similar pressures. Official data has 30% of firms loss making, industry association estimates 70%. Chinese coal producer losses Billion RMB 8 7 6 5 4 3 2 1 Source: CEIC. Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 loss value proportion of loss making firms (rhs) 40 35 30 25 20 15 10 5 %
Emerging economies will be the driver of higher electricity consumption in the 21 st century. Per capita consumption currently very low compared to OECD. Electricity use and economic development 20000 Electricity use per person (kwh) 16000 12000 8000 4000 China South Korea Japan US India 10000 20000 30000 40000 50000 60000 70000 80000 GDP per person (2005 $US) Sources: IEA; World Bank.
Renewables may be the fastest growing energy source, but coal remains the largest. World electricity capacity under construction or approved 350 300 250 200 150 100 50 GW coal hydro gas nuclear other renewables oil OECD Non-OECD Source: Enerdata, www.enerdata.net.
Australia s thermal coal exports expected to increase to meet world demand. Australia s thermal coal exports Forecast 250 25 200 20 150 15 100 10 50 Mt 1998-99 2002-03 2006-07 2010-11 2014-15 2018-19 5 2014 15 A$b Sources: ABS; BREE. volume value (rhs)
Key messages 1. Prices are lower, but commodities consumption will continue to grow as highly populated emerging economies improve their living standards. 2. The investment phase of Australia s mining boom is drawing to an end, but the production phase is just starting. 3. Reducing costs and increasing productivity will be the focus on the production phase to meet increasing international competition. 4. Infrastructure networks have an important role to play in achieving higher productivity and reducing costs.
Thank you John Barber Senior Economist Bureau of Resources and Energy Economics Department of Industry 0262437988 john.barber@bree.gov.au bree.gov.au