Resources and Energy Quart Jan 2012

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Resources and EnergyQuarterlyDecember Quarter 2011

bree.gov.au


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December quarter 2011

Resourcesand Energy

Quarterly

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BREE 2011, Resources and Energy Quarterly.

Commonwealth of Australia 2011

This work is copyright, the copyright being owned by the Commonwealth of Australia. The Commonwealth ofAustralia has, however, decided that, consistent with the need for free and open re-use and adaptation, public sectorinformation should be licensed by agencies under the Creative Commons BY standard as the default position. Thematerial in this publication is available for use according to the Creative Commons BY licensing protocol wherebywhen a work is copied or redistributed, the Commonwealth of Australia (and any other nominated parties) mustbe credited and the source linked to by the user. It is recommended that users wishing to make copies from BREEpublications contact the Chief Economist, Bureau of Resources and Energy Economics (BREE). This is especiallyimportant where a publication contains material in respect of which the copyright is held by a party other than theCommonwealth of Australia as the Creative Commons licence may not be acceptable to those copyright owners .

The Australian Government acting through BREE has exercised due care and skill in the preparation and compilationof the information and data set out in this publication. Notwithstanding, BREE, its employees and advisers disclaimall liability, including liability for negligence, for any loss, damage, injury, expense or cost incurred by any person as aresult of accessing, using or relying upon any of the information or data set out in this publication to the maximumextent permitted by law.

ISSN 978-1-921812-89-7 (Print)

ISSN 978-1-921812-88-0 (Online)

Vol. 1, no. 2

From 1 July 2011, responsibility for resources and energy data and research was transferred from ABARES to theBureau of Resources and Energy Economics (BREE).

Postal address:BureauofResourcesandEnergyEconomicsGPO Box 1564Canberra ACT 2601

Phone: +61 2 6276 1000

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


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ResourcesandEnergyQuarterlyvol1no2Decemberquarter20113

Foreword

Resources and Energy Quarterly is an important publication of the Bureau of Resources andEnergy Economics. It provides an overview of the global macroeconomic situation; the mostup-to-date global production and consumption data; forecasts for Australian volumes and

values for key resources and energy commodities for 201112; reviews of key topics and issuesof relevance to the sector; and detailed statistical tables on world production, consumption,

stocks and trade in key commodities as well as detailed information on Australian productionand exports over several years.

In the review section ofResources and Energy Quarterlythere is an up-to-date analysis of the

euro crisis and its economic implications; a historical review of global oil prices, production andreserves; the impact of gold on the Australian economy since the first gold rush in the 1850s;

and an economic analysis of trends in energy productivity and intensity in the Australian grainsindustry.

The good news for Australia is that there is continued year-on-year growth in the total valueof Australian exports of resources and energy commodities. For 201112, BREE projects that

the total value of Australian exports of energy minerals and metals will exceed A$200 billion,or a 15 per cent increase over 201011. Despite these projected record export earnings, spot

prices of key bulk commoditiesiron ore and metallurgical coalhave weakened in the pastquarter, and there are real downside risks to the global economy associated with the euro

sovereign debt and liquidity crisis. For those interested in longer term forecasts, our next issue

ofResources and Energy Quarterlythat will be released in March 2012 will provide projectionsout for the next five years.

Quentin Grafton

Executive Director/Chief Economist

Bureau of Resources and Energy Economics


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4 ResourcesandEnergyQuarterlyvol1no2Decemberquarter2011

Contents

Oil and gas 19

Thermal coal

Foreword 3

Acronymsandabbreviations 5

Macroeconomicoutlookandenergyandmineralsoverview 6

Energyoutlook 19

Resourcesoutlook 35

Steel and steel-making raw materials 35Gold 46

Aluminium 51Copper 57

Nickel 61Zinc 68

Reviews 76Sovereign debt crises, the real economy and the euro zone crisis 76Global oil prices, reserves, production and intensity: An overview 82

Gold and Australias economic development 94Energy Productivity Analysis of the Australian Grain Industry 100

StatisticalTables 111


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Acronyms and abbreviations

ABARES Australian Bureau of Agricultural and Resource Economics and Science

ABS Australian Bureau of Statistics

BREE Bureau of Resources and Energy Economics

FOB free on board

GDP gross domestic product

IEA International Energy Agency

IMF International Monetary Fund

LME London Metal Exchange

LNG liquefied natural gas

mb/d millions of barrels per day

MBtu million British thermal units

Mt million tonnes

OECD Organisation for Economic Co-operation and Development

OPEC Organisation of the Petroleum Exporting Countries

PPP purchasing-power parity

RBA Reserve Bank of Australia

SAIL Steel Authority of India

TWI trade-weighted index

UNCTAD United Nations Conference on Trade and Development

WTI West Texas Intermediate


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Macroeconomic outlook and

energy and minerals overviewNhu Che, Thuy Pham and Quentin Grafton

The global economy: slowing growth and rising risks

There are a number of downside risks to the global economy in the 2011. Despite an upward

revision of economic growth in the US, unemployment remains high and the ongoingsovereign debt crisis in the euro zone could generate substantial negative spillovers to thereal economy, and not just to those in Europe. The large volatility in financial markets in recent

months is an indication of the uncertainty about near-term economic prospects.

The global economy has recovered since the global financial crisis, although occurring atdifferent speeds across regions. While the expectation is for growth in major advanced

economies to be slow, the emerging economies of Asia are expected to continue to growstrongly. This is promising for Australias export prospects, as most of Australias major trading

partners are in Asia.

At the start of 2011, forecasts for economic growth were for a slight moderation in the speedof the global economic recovery relative to 2010. However, the March 2011 earthquakes and

tsunami in Japan that affected global supply chains, high energy prices, and weakeningconsumer confidence in some developed economies has had a negative impact on short-term

growth prospects.

Growth in Western Europe has faltered in 2011 with confidence eroded by the escalatingconcerns about sovereign debt. Elsewhere, economic activity remained robust. Most of Asia

and Latin America has had strong growth in 2011, with their primary concerns being aboutrising inflation and not lagging growth. The outlook for major developed economies in 2012

is for a continued positive, but weak and bumpy growth. Prospects for emerging marketeconomies are much better, but are becoming less certain, especially for those countries that

are highly reliant on export-led growth.

Less certain future growth prospects associated with the sovereign debt crisis in Europe hasgenerated very large fluctuations in financial markets in the second half of 2011. This volatility

has led some analysts to expect further weakening in the global economy due to sharp falls inconsumer and business confidence. For a more in-depth analysis of the euro zone crisis, please

see the review article Sovereign debt crises, the real economy and the euro zone crisis.


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In Asia, recent economic data has been mixed, although broadly consistent with the modest

slowdown that some authorities in the region have been trying to achieve in order to containinflationary pressures. India and China, in particular, are trying to reduce inflation and their

actions are expected to moderate slightly their very high growth rates.

Figure1: Worldeconomicgrowth,1996to2012

Source: ABARES, BREE

Economic prospects in Australias major export markets

Non-OECD economies

In the second half of 2011 Chinas economic growth has slowed in relation to the first half of

2011. The largely government-engineered moderation is expected to provide more stable andsustainable growth for the economy throughout 2012, although the economy is facing increasingly

complex reform challenges. In 2012, Chinas GDP growth is projected to ease to around 9 per centunder the combined effect of monetary-tightening economic policies and continued weakness in

advanced economies that has weighed negatively on exports growth. To help reduce inflation theChinese Government increased interest rates five times in the past year and also raised the reserveratio requirement for banks on several occasions. Industrial production growth is also projected to

slow. Despite this slight contraction in growth, China is still expected to continue its major role inboth the supply and demand side of the global economy.

Indias economic outlook has improved in recent months, reflecting an increase in

manufacturing output that has strengthened private consumption. However, economicgrowth is still expected to slow to 7.5 per cent in 2012. In part, this is because of an expected

continuation of a monetary policy response to target relatively high rates of inflation.

Near-term growth in the ASEAN countries (including Indonesia, Malaysia, Philippines, Thailand, andVietnam) is assumed to be around 5.5 per cent in 2011 and 2012 due to robust domestic demand

in particular, strong investmentwhich should offset any slowdown in export growth.

-1

%

1

2

3

4

5

6

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996


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In Asia overall, growth has moderated slightly, reflecting a general tightening of

macroeconomic policy over the past year or so in response to increasing inflation in theregion. After recovering strongly from the global recession, growth in the newly industrialised

economies of South Korea, Singapore, Hong Kong and Taiwan is expected to slow due to

weaker export demand and tighter fiscal positions.

OECD economies

Economic growth in OECD economies is assumed to increase by 1.7 per cent in 2012, up from1.4 per cent in 2011. Recovering from the damage caused by the March 2011 earthquakes

and tsunami, Japans industrial production is now growing rapidly, business sentiment hasimproved sharply, and household spending is rebounding. Japans gross domestic product

(GDP) is assumed to grow by 2.3 per cent in 2012.

In the euro area, the outlook remains weak. Growth is expected to moderate as an easing inworld growth slows export trade. Fiscal consolidation across the region which started in 2011 is

likely to weigh on the labour market and household consumption, and tight credit conditionsare likely to continue to restrain investment. The recovery is expected to remain sluggish in

2012.

The pace of growth in the 17 euro zone economies has slowed in the second half of 2011,and the near-term outlook for the European Union (EU) as a whole remains highly uncertain.

In Greece, Ireland, Italy, Portugal, and Spain, fiscal tightening, banking system issues, reducedconsumer and business confidence and high unemployment are weighing on domestic

demand. Further, slowing economic growth in the core northern euro area economies, suchas Germany, is likely to make economic conditions in the southern economies more difficult in2012.

The German economy, driven by export-led growth, is assumed to have the strongest

economic growth rate in Western Europe, growing by 2.7 per cent in 2011. However, morerecent data indicates that there has been a decline in business confidence. Retail sales in

Germany fell by 2 per cent over the September quarter 2011, and forward-looking indicators ofgrowth in exports and in machinery and equipment investment have moderated. This recent

data highlights the downside risks of the forecasts for Europe, as they are highly dependent onGerman economic growth.

In 2011, economic growth in the US is assumed to be modest at 1.5 per cent, before

recovering to 1.8 per cent in 2012. However, modest consumer spending, weak jobs growthand continued strains in the housing market pose risks for the economy. Assumed very low

nominal interest rates over the next two years are expected to provide a boost to investmentover the short term. Despite the recent pick-up in growth, GDP has only just returned to its

pre-crisis peak.


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Table1: Keymacroeconomicassumptions

2009 2010 2011 a 2012 a

World

Economic growth

OECD % 3.4 3.0 1.4 1.7

United States % 3.5 3.0 1.5 1.8

Japan % 6.3 4.0 0.5 2.3

Western Europe % 4.1 1.8 1.5 1.0

Germany % 5.1 3.7 2.7 1.3

France % 2.7 1.5 1.7 1.4

United Kingdom % 4.9 1.4 1.1 1.6

Italy % 5.2 1.3 0.6 0.3

Korea, Rep. of % 0.3 6.2 3.9 4.4

New Zealand % 2.1 1.7 2.0 3.8

Developing countries % 4.2 7.8 6.8 6.5

non-OECD Asia % 6.9 9.6 8.3 8.1

South-East Asia b % 1.7 6.9 5.3 5.6

China c % 9.2 10.3 9.5 9.0

Chinese Taipei % 1.9 10.9 5.2 5.0

Singapore % 0.8 14.5 5.3 4.3

India % 7.0 9.0 7.8 7.5

Latin America % 1.7 6.1 4.5 4.0

Russian Federation % 7.8 4.0 4.3 4.1

Ukraine % 14.8 4.2 4.7 4.8

Eastern Europe % 3.6 4.2 4.3 2.7

World d % 0.5 5.0 3.8 3.8

Industrial production

OECD % 14.1 7.9 3.1 4.1

Inflation

United States % 0.4 1.6 3.4 2.7

Interest rates

US prime rate e % 3.3 3.3 3.3 3.3

a BREE assumption. b Indonesia, Malaysia, the Philippines, Thailand and Vietnam. c Excludes Hong

Kong. d Weighted using 2010 purchasing-power-parity (PPP) valuation of country GDPs by the IMF. e

Commercial bank prime lending rates in the US.

Sources: BREE; Australian Bureau of Statistics; IMF; OECD; RBA.


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Demand for mining commodities

Over 201112, demand for mineral and energy commodities is projected to grow strongly.Demand growth will be supported mainly from China, India and other non-OECD economies.

Consumption of raw materials is forecast to be driven by increasing household incomes,coupled with industrial and housing construction growth, and strong demand for consumer

durables and transport infrastructure.

Demand in the OECD is expected to be led by Japan in response to the rebuilding ofinfrastructure following the March 2011 earthquakes and tsunami. Consumption demand in

large export-oriented EU economies, such as Germany, will depend on efforts to remediatepublic debt and liquidity concerns in the region as a whole. Faster convergence to trend

economic growth in the US is forecast to boost energy and minerals demand in that economy,but its positive impact on resource commodities will depend on the scale of the recovery in its

housing and labour markets.

Supply for mining commodities

In 2012, world production of most minerals and energy commodities is forecast to increase,

relative to 2011. Higher production across most commodities reflects relative high prices in2011 that have provided an incentive for suppliers to increase output. Production increases

have been forecast for uranium (up 12 per cent), aluminium (up 8 per cent), nickel (up 8 percent), steel (up 6 per cent), zinc (up 5 per cent), and copper (up 4 per cent). In addition, world

trade in 2012 is forecast to increase by 7 per cent for iron ore and 5 per cent for coal.

Australias economic prospects

The Australian economy is relatively strong compared with other developed economies. Real

GDP in Australia grew by 1.8 per cent in 201011 and is assumed to grow by 4 per cent in 201112. The relatively moderate economic growth in 201011 stemmed from the negative affect of

flooding in Queensland and Northern NSW, a moderate growth rate in the non-mining sectors,and below trend productivity growth. Offsetting the negative effects of these factors has been

an upswing in household spending on some key items, such as motor vehicles.

Recent economic data suggest that the mining-related sectors of the economy have

continued to perform strongly in terms of both volumes of exports and capital investmentrelative to other sectors. Overall, domestic demand is expected to continue to grow at a robustpace, although a relatively high exchange rate, the winding back of government stimulusspending programs, and changes in household spending and borrowing behaviour continue

to have a negative effect on some industries. As in many other countries, recent volatilityin global financial markets has resulted in noticeable declines in measures of consumer and

business confidence since July.


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Table2: KeymacroeconomicassumptionsforAustralia

Australia 200809 200910 201011 201112 a

Economicgrowth % 1.4 2.3 1.75 4.0

Inflation % 3.1 2.3 3.1 3.3

Australianexchangerates

US$/A$ 0.75 0.88 0.99 1.00

TWIforA$b 60.0 69.0 74.0 75.0

a BREE assumption. b Base: May 1970 = 100.

Sources: BREE; Australian Bureau of Statistics; IMF; OECD; RBA.

In November 2011 the Australian dollar depreciated against the US dollar, trading at US101c and

TWI 75 compared with around US107c and TWI 77 in early June 2011.

Over 201112, the Australian dollar is assumed to average around US100c and TWI 75. A keydriver of the Australian exchange rate in 2012 is recent interest rates cuts by the Reserve Bank

of Australia that will dampen demand for Australian dollars. Should the euro crisis worsen,this may also have negative impacts on the ability of Australian banks to borrow on overseas

markets, and may reduce capital inflows that would tend to lead to a depreciation of the

Australian dollar. Demand for Australias exports in Asia, and market expectations aboutminerals and energy commodity prices, are also factors that will influence the value of theAustralian dollar in 20112012.

The Australian mining industry

In 201011, the gross value added produced by the mining industry was approximately $117.7

billion. Of this total, the mining sector (excluding services to mining) contributed $110.4 billionwhile the exploration and mining support services generated about $7.3 billion (see Figure 2).


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Figure2: Australianminingindustrygrossvalueadded,chainvolumemeasures,199091to201011

Source: ABS.

Over the past decade, there has been a significant increase in the value of investment in the

mining sector. In 201011, investment in new capital expenditure in the mining sector wasvalued at $47 billion. This compares with inflation-adjusted figures of $39 billion in 200910

and $7.6 billion a decade ago. In 201112, the Australian Bureau of Statistics estimates indicatenew capital expenditure in the mining sector may reach $80 billion. Much of this investment is

underpinned by liquefied natural gas (LNG), iron ore and coal projects.

ABS data indicates that the mining industry employed a total of 205 300 people in 201011,which represents an increase of 19 per cent compared with 200910 and an increase of 173

per cent from 200001. By sub-industry, the metal ore industry employed the largest numberof people (approximately 69 200 people), accounting for 34 per cent of employment in the

mining industry (see Figure 3). The coal industry ranked second followed by the oil and gasextraction industry.

2011-12A$b

75

80

85

90

95

100

Mining (excludes services to mining)

201

0-11

200

9-10

200

8-09

200

7-08

200

6-07

200

5-06

200

4-05

200

3-04

200

2-03

200

1-02

200

0-01

199

9-00

199

8-99

199

7-98

199

6-97

199

5-96

199

4-95

199

3-94

199

2-93

199

1-92

199

0-91

2011-12A$b

2

4

6

8

10

12

Exploration and mining support services (right axis)


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Figure3: EmploymentintheAustralianminingindustry,199091to201011

Source: ABS.

Commodity prices

Commodity prices were lower in the September quarter compared with the previousquarter, but were still at higher levels than the first half of 2009. Lower bulk commodity

prices largely reflected a slowing in the growth of global steel production and higher iron

ore and metallurgical coal exports from Australia in the second half of 2011. Spot prices forthe key steelmaking commoditiesiron ore and metallurgical coalhave fallen sharply

since September 2011, as have steel prices. Demand for iron ore in Europe appears to haveweakened, which has led to some diversion of Barillian supply towards Asia. Some base metals

have also declined in price in response to weaker financial markets.

Prices for energy-related commodities, such as thermal coal and oil, were little changed overthe quarter. The resilience of the thermal coal spot price relative to other bulk commodities

reflects different demand conditions. For instance, the shutdown of nuclear power generationcapacity in several countries (especially Japan), and below average hydro-electricity production

in China, are providing underlying support for thermal coal demand.

000people

50

100

150

200

Other mining (including services)Metal oreOil and gas extractionCoal

20

10-11

20

09-10

20

08-09

20

07-08

20

06-07

20

05-06

20

04-05

20

03-04

20

02-03

20

01-02

20

00-01

19

99-00

19

98-99

19

97-98

19

96-97

19

95-96

19

94-95

19

93-94

19

92-93

19

91-92

19

90-91


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Figure4: Metalpriceindex,quarterly

Source: BREE.

Figure5: Bulkcommoditypriceindex,quarterly

Source: BREE.

Australian mine production and exports

In 201011, the index of Australian mine production remained relatively stable compared with200910, reflecting a 12 per cent increase in metals and other minerals production which was

offset by an 11 per cent decrease in the production of energy commodities (see Figure 6).

index

Mar-00=100

200

400

600

800

1000

1200

Iron oreMetallurgical coalThermal coal

Dec-12

Dec-11

Dec-10

Dec-09

Dec-08

Dec-07

Dec-06

De

c-05

De

c-04

De

c-03

De

c-02

De

c-01

De

c-00

index

Mar-00=100

100

200

300

400

500

600

700

800

ZincNickelLead

GoldAluminiumCopper

Dec-12

Dec-11

Dec-10

Dec-09

Dec-08

Dec-07

Dec-06

Dec-05

Dec-04

Dec-03

Dec-02

Dec-01

Dec-00


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Total Australian mine production is forecast to increase by 11 per cent in 201112, largely

attributed to a 15 per cent increase in the output of energy commodities, particularly thermalcoal, metallurgical coal and uranium. Also contributing to this growth will be a 6 per cent

increase in the production of metals and other minerals, underpinned by rising nickel, zinc and

copper production.

Figure6: Australianmineproductionindex,198990to201112

Source: BREE.

In terms of exports, earnings from exports of energy and minerals commodities increased by29 per cent between 200910 and 201011, reaching $179 billion in 201011 (see Figure 7). Of

this total, export earnings from minerals commodities contributed $110 billion, accounting forabout 61 per cent. Export earnings from energy commodities accounted for a smaller share, 39

per cent that contributed approximately $70 billion in real terms of the total value of Australianenergy and minerals exports.

index

1997-98 =100

mineralsenergy

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

1990-91

1989-90

20

40

60

80

100

120

140

160


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Figure7: Australianenergyandmineralexportearnings,198990to201112

Sources: BREE; ABS.

In 201112, total export earnings for energy and minerals commodities are forecast to increaseby 15 per cent to $206 billion, reflecting increases in export values for both energy and mineralscommodities. Energy commodity export earnings are forecast to grow by 19 per cent to $83 billion

as a result of strong increases in export earnings from thermal coal (up 34 per cent to $18.8 billion),oil (up 21 per cent to $14.2 billion), LNG (up 15 per cent to $12 billion), and metallurgical coal (up

13 per cent to $33.6 billion). Mineral commodity export earnings are forecast to increase by12 per cent to $123 billion as a result of increase in export values of gold (up 45 per cent to

$18.9 billion), iron ore (up 12 per cent to $60.4 billion), alumina (up 18 per cent to $6.2 billion), andcopper (up 3 per cent to $8.7 billion). Partially offsetting the increased export earnings for mineral

commodities will be lower forecast export earnings for zinc (down 10 per cent to $2.1 billion), nickel(down 9 per cent to $3.7 billion), and aluminium (down 4 per cent to $4 billion).

Table3: Australiaenergyandmineralsexports,byselectedcommodities

Commodity Volume Value

Unit 2010-11 2011-12 % change Unit 2010-11 2011-12 % change

Oil ML 19 636 20 806 6.0 $m 11 772 14 180 20.5

LNG Mt 20 20 -0.3 $m 10 437 11 978 14.8Thermal coal Mt 143 163 13.4 $m 13 956 18 760 34.4

Uranium t 6 950 7 930 14.1 $m 610 791 29.7

Iron ore Mt 407 460 13.0 $m 54 197 60 412 11.5

Metallurgical coal Mt 140 150 6.8 $m 29 796 33 595 12.8

Gold t 301 336 11.9 $m 13 014 18 874 45.0

Alumina kt 16 227 16 799 3.5 $m 5 218 6 156 18.0

Aluminium kt 1 686 1 741 3.3 $m 4 178 4 029 -3.6

Nickel t 210 233 11.1 $m 4 097 3 748 -8.5

Copper t 850 935 9.6 $m 8 416 8 654 2.8

Zinc t 1 482 1 499 2.4 $m 2 375 2 144 -9.7

Sources: BREE; ABS.

2011-12A$b

20

40

60

80

100

120

140

MineralsEnergy

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

1990-91

1989-90


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Table4: MajorindicatorsofAustraliasmineralsandenergysector

2006

07

2007

08

2008

09

2009

10

2010

11

2011

12 f

% Change from

previous year2010

11

2011

12

Commodity exports

Exchange rate US$/A$ 0.78 0.90 0.75 0.88 0.99 1.00 12.5 1.0

Unit returns b

Mineral resources index 100.0 104.9 142.2 111.7 141.2 149.1 26.4 5.6

energy minerals index 100.0 114.2 192.8 125.3 153.5 171.1 22.5 11.5

metals and other

minerals

index 100.0 99.2 112.1 103.7 134.0 136.0 29.2 1.5

Value of exportsMineral resources A$m 107 515 117 362 161 796 139 468 179 233 205 830 28.5 14.8

energy minerals A$m 39 427 45 591 77 892 57 478 69 673 83 056 21.2 19.2

metals and other

minerals

A$m 68 088 71 771 83 903 81 990 109 560 122 774 33.6 12.1

Total commodities A$m 139 263 148 702 197 701 171 551 215 312 243 842 25.5 13.3

Minerals and energy

sector

Volume of mine

production

index 121.3 120.7 121.4 125.0 125.1 138.3 0.1 10.6

energy index 118.9 116.6 122.8 126.2 111.9 129.1 11.3 15.4

metals and other

minerals

index 124.3 124.8 119.6 123.5 138.8 147.7 12.4 6.4

Gross value of mine

production

A$m 103 214 112 667 155 324 133 890 172 064 197 597 28.5 14.8

New capital

expenditure c

A$m 23 621 29 201 37 977 35 185 47 247 na 34.3 na

Exploration expenditure A$m 3 940 5 496 6 034 5 727 6 246 na 9.1 na

energy A$m 2 533 3 501 4 293 3 984 4 028 na 1.1 na

metals and otherminerals

A$m 1 407 1 995 1 741 1 742 2 218 na 27.3 na

Employment

Mining 000 136 146 170 173 205 na 18.6 na

Australia 000 10 388 10 708 10 892 11 027 11 355 na 3.0 na

b Base year: 200607=100. c Mining industry (ANZSIC subdivision B) only. f BREE forecast. na Not available.

Note: The indexes for the different groups of commodities are calculated on a chain weight basis using

Fishers ideal index with a reference year of 199798=100.

Sources: BREE; ABS.


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Major Australian commodity exports

201112 f

world

volume price value

p p pIron ore and pellets13% 36% 11%

p p pMetallurgical coal7% 52% 13%

p p pGold12% 28% 45%

p p pThermal coal13% 33% 34%

p p pCrude oil6% 16% 21%

p pLNG0% 15% 15%

p p pCopper10% 28% 3%

p p pAlumina4% 14% 18%

p q qNickel11% -17% -9%

p q qAluminium3% -4% -4%

p q qZinc2% -9% -10%

q q qTitanium and zircon-4% -7% -11%

p q qLead3% -11% -10%

p pManganese ore15% na 4%

p p pBunker fuel1% 17% 19%

p p pLPG3% 13% 17%

a

b

c

d

e

f

g

h

i

j

k

l

m

n

o

p

0 20 40 60 80

2011-12 f

2010-11

$b

A$33.6bA$29.8b

A$18.9b

A$13.0b

A$18.8b

A$14.0b

A$14.2bA$11.8b

A$12.0b

A$10.4b

A$8.7bA$8.4b

A$6.2bA$5.2b

A$3.7b

A$4.1b

A$4.0bA$4.2b

A$2.1bA$2.4b

A$1.8bA$2.0b

A$1.9bA$2.1b

A$1.5bA$1.4b

A$1.8bA$1.5b

Metallurgical

coal

A$1.2bA$1.1b

Gold

Thermal coal

Crude oil

LNG

Copper

Alumina

Nickel

Aluminium

Zinc

Titanium

and zircon

Lead

Manganeseore

Bunker fuel

LPG

A$60.4bA$54.2b

Iron ore andpellets

LNG and alumina are export unit returns in $A. All other commodities are world indicator prices in $US. For export value, annual forecasts are the

sum of quarterly forecasts. As a result, annual export values do not necessarily reflect variations in export volumes, world prices and exchange

rates. Iron ore and metallurgical coal are average negotiated contract prices for calendar years (e.g. 201112 = 2011). Thermal coal is the annualnegotiated contract price for the Japanese fiscal year running from April 2011 to March 2012.


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Energy outlook

Oil and gas

Nina Hitchins and Adrian Waring

In 2012, oil prices are forecast to remain high, relative to 2011, underpinned byconsumption growth in emerging economies. Consumption growth in OECD economies is

forecast to remain unchanged in 2012.

Growth in oil production is forecast to be strongest in non-OPEC countries during 2012,while OPEC oil production growth is expected to be supported by increased production

of natural gas liquids.

In 201112, the value of Australian crude oil and condensate exports are forecast toincrease 21 per cent to $14.2 billion.

Moderate oil price increases

In the first half of 2011, the West Texas Intermediate (WTI) oil price averaged $98 a barrel, an

increase of 24 per cent relative to the annual average in 2010. The price increase reflectedsupply disruptions in Libya, increases in Japans oil-fired electricity generation following

the March 2011 earthquakes and tsunami, and strong consumption growth in emergingeconomies. The oil price fell by 12 per cent in the September quarter of 2011, relative to the

previous quarter, and is estimated to average US$92 a barrel in the second half of 2011. Lowerprices reflect deteriorating market sentiment resulting from sovereign debt issues in the US

and Europe, and increasing concerns of weaker economic growth and reduced global oildemand. For 2011 as a whole, oil prices are estimated to average US$95 a barrel.

In 2012, prices are forecast to increase, supported by an assumed marginal improvement in

OECD economic growth. The average WTI price in 2012 is forecast to rise by 5 per cent, relativeto 2011, to US$100 a barrel. A significant risk to the outlook for oil prices is weakening world

economic growth over the next 12 months (for further details on macroeconomic assumptionsand associated risks, see the macroeconomic outlook and energy and minerals overview).

OPEC spare capacity decreased during 2011 as a result of production shut-ins in Libya andincreased production from other OPEC economies to counteract the Libyan shortfall. In

October 2011, OPEC spare capacity was 4.6 million barrels a day, 25 per cent below the averagein 2010. OPEC spare capacity is expected to increase in 2012 as Libyan production ramps-up

and new oil fields come online in Iraq and Angola. However, OPEC spare capacity is likely toremain low, relative to 2010, supporting higher prices in 2012.

OECD oil stocks fell in the September quarter of 2011 following a decision by the International

Energy Agency (IEA) in June that member countries would collectively release 60 millionbarrels over 30 days. In September 2011, OECD stocks were 2 per cent below those recorded in

the same month a year earlier.


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Box1:TheBrent-WTIpricedifferential

Crude oils differ in quality across fields and regions. Generally crudes with low density

(light) and low sulphur content (sweet) are of higher quality compared to high density(heavy), high sulphur content (sour) crudes. Light sweet crudes require less processing,produce more valuable products and, therefore, attract higher prices.

West Texas Intermediate is light sweet crude oil that is typically produced in northern

US and Canada, and is the traditional price benchmark for US crude oil. WTI is traded onthe New York Mercantile Exchange and priced against delivery to Cushing, Oklahoma.

Generally, WTI is refined in the Midwest of the US or transported to Cushing for distributionto other refineries.

Brent North Sea crude, or Brent, originates from the North Sea, northeast of the United

Kingdom. It is also a light sweet crude, although typically of lower quality than WTI.Consequently, WTI has historically attracted a higher price than Brent.

However, since the start of 2011, the price relationship between WTI and Brent has not

reflected their relative quality and in September 2011, the price of Brent averaged US$24 abarrel, or 28 per cent, higher than WTI.

Figure1: PricedifferencefromWTI

Sources: BREE; EIA.

Several factors have contributed to this price premium reversal. One factor is the effect ofincrease stocks of WTI crude in Cushing, which have put downward pressure on the WTI

price. Increased production of unconventional oil in the US and Canada, combined with arecent lull in consumption in the US, and a bottleneck in pipeline capacity out of Cushing,

has caused WTI stocks to climb.

-10

-5

US$/bbl

5

10

15

20

25

30

World Trade Weighted Average (WTWA)Brent

Oct-11Oct-10Oct-09Oct-08Oct-07Oct-06Oct-05


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Weak world oil consumption growth

In the first 9 months of 2011, world oil consumption averaged 88.8 million barrels a day, a

1.2 per cent increase from the same period in 2010. The growth in oil consumption reflectsgreater demand in the emerging economies in Asia, particularly China and India, that was only

partially offset by a decrease in consumption in the OECD economies. For 2011 as a whole,world oil consumption is estimated to increase by 1 per cent, relative to 2010, to average

89.2 million barrels a day.

World oil consumption in 2012 is forecast to increase by 1.4 per cent, relative to 2011, to anaverage of around 90.5 million barrels a day. OECD oil consumption in 2012 is forecast to

remain at similar levels to 2011, as the US and Europe continue to experience weak economicgrowth. Accordingly, all growth in world oil consumption in 2012 is forecast to be attributed tonon-OECD economies.

Meanwhile, other factors have placed upward pressure on the price of Brent. Firstly,

production in the North Sea during 2011 has decreased relative to 2010. Secondly,production shut-ins in Libya during the 2011 civil war disproportionally affected the Brent

market, as Libyan crude is a key source of oil for many European refineries.

In October 2011, the price premium for Brent over WTI declined, reflecting the restart ofLibyan production. As production in Libya continues to increase, this output will place

further downward pressure on the price of Brent.

In 2012, the price premium for Brent is likely to diminish. There are plans to reverse apipeline that connects the Gulf of Mexico to Cushing, allowing 150 000 barrels a day of

crude to flow to the Gulf coast from the second quarter of 2012, increasing up to 400 000barrels a day by 2013. News of the pipeline reversal saw the Brent premium fall to as low as

nine dollars in November. The pipeline reversal should relieve the bottleneck, reduce stocks

in Cushing and put upward pressure on the WTI.


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Figure2: Worldoilconsumption

Sources: BREE; IEA.

Emerging economies underpin demand growth

In 2011, oil consumption in emerging economies is estimated to increase by 3 per cent, relativeto 2010, to average 43.4 million barrels a day. The continued consumption growth reflects

resilient domestic demand and petroleum product price controls, which have mitigated theeffect of higher crude oil prices.

The expanding middle class in China and India continue to spur increases in personal vehicleownership and underpin growth in oil consumption. In China, oil consumption is estimated toincrease by 5 per cent to average 9.5 million barrels a day in 2011. Domestic price controls have

helped to insulate consumers from high crude oil prices during the first half of 2011. In October2011, the National Development and Reform Commission reduced retail prices for petrol and

diesel by around 3 per cent, the first reduction in 16 months. Chinas oil consumption in 2012 isforecast to increase by a further 5 per cent and account for over a third of the increase in world oil

consumption growth, underpinned by an assumed continuation of strong economic growth.

In India, domestic price controls on diesel and robust economic growth have supported stronggrowth in oil consumption in 2011, which is estimated to increase by 3 per cent relative to 2010.

Despite falls in international crude prices during the September quarter, a depreciation of theRupee deterred officials from lowering domestic diesel prices further. In 2012, oil consumption inIndia is forecast to grow by a further 3 per cent to average 3.6 million barrels a day. An increase in

consumption is expected to be supported by strong growth in motor vehicles sales.

In the Middle East, Irans oil consumption is forecast to contract by 2 per cent in 2011, relativeto 2010, following the removal of domestic petrol and diesel subsidies. Iran accounts for

over a quarter of Middle Eastern oil consumption. Despite decreases in Iranian oil demand,consumption in the Middle East overall is forecast to increase by 3 per cent in both 2011 and

2012 to average 8.3 million barrels a day in 2012, reflecting an assumption of sustained strong

economic growth in the region.

mb/d

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40

50

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90

201220082004200019961992198819841980

OECD Non-OECD


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OECD oil consumption to remain unchanged in 2012

Consumption of oil in OECD economies is estimated to contract by 0.9 per cent in 2011,relative to 2010, to average 45.8 million barrels a day. This primarily reflects a decline in US

and European consumption. However, decreases in the US and Europe were partially offsetby increased consumption in the Pacific region (Australia, Republic of Korea, Japan and New

Zealand). In 2012, OECD oil consumption is forecast to remain steady at an average of 45.8million barrels a day.

Europes oil consumption is estimated to decline by 1.3 per cent in 2011, relative to 2010,

and by a further 0.9 per cent in 2012 to average 14.3 million barrels a day. Assumed weakeconomic growth and falling intensity of oil use are both expected to contribute to lower oil

consumption in Europe.

In 2011, oil consumption in North America is estimated to contract by 1.1 per cent to average23.5 million barrels a day. The decease in North American consumption is expected to be

underpinned by weak economic growth in the US, where demand for refined products fellby 3 per cent year-on-year in the September quarter 2011. For 2011 as whole, oil consumptionin the US is estimated to decrease by 1.3 per cent, relative to 2010, to average 18.9 million

barrels a day. US economic growth in 2012 is assumed to increase modestly relative to 2011,and expected to support a 0.6 per cent increase in US oil consumption to average 19.0 million

barrels a day. Accordingly, North American oil consumption is forecast to increase by 0.5 percent in 2012 to average 23.6 million barrels a day.

In the Pacific region, oil consumption is forecast to increase marginally to average 7.9 million

barrels a day in 2012. The growth in oil consumption is likely to be led by Japan, where oilconsumption is estimated to increase 0.7 per cent in 2011 and 2012 to average 4.5 million

barrels a day in 2012. Increased consumption in Japan is expected to be associated withreconstruction activities and supported by greater capacity utilisation of oil-fired electricity

generation plants following the March 2011 earthquakes and tsunami.

Modest growth in world oil production

World production of oil is estimated to increase by 2 per cent in 2011, relative to 2010, to

average 88.8 million barrels a day. Increases in OPEC production are expected to account

for the majority of the increase, with production outages constraining output growth innon-OPEC economies. In 2012, world oil production is forecast to increase by a further 2 percent, with non-OPEC production accounting for around 60 per cent of total growth.

Moderate OPEC crude production, robust OPEC NGL production

OPEC oil production is estimated to increase by 3 per cent in 2011, and forecast to increase byan additional 2 per cent in 2012 to average 36.6 million barrels a day. The increase in OPEC oil

production is forecast to be underpinned by moderate increases in crude oil production androbust growth in natural gas liquids.


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In the first nine months of 2011, crude oil production in OPEC countries increased 1.3 per

cent year-on-year, despite production shut-ins throughout Libya during the civil war. Duringthe same period, OPEC production growth was supported by increased output from Saudi

Arabia and the United Arab Emirates. In the case of Saudi Arabia, oil production averaged

8.9 million barrels a day, a 12 per cent year-on-year increase. For 2011 as a whole, OPEC crudeoil production is estimated to increase by 2 per cent to average 30.1 million barrels a day,reflecting greater Libyan production in the December quarter.

Prior to the outbreak of civil war in Libya, its crude oil production was around 1.6 million barrels

a day. However, once the conflict began, production declined to close to nil. Following the fallof the Gaddafi regime, oil production in Libya recommenced. In areas with minimal damage to

production and export infrastructure, oil production has reportedly surpassed 750 000 barrelsa day. The Libyan National Oil Corporation forecasts that Libyas oil production will reach

1 million barrels a day by April next year, and return to pre-civil war output by the end of 2012.

In 2012, OPEC crude oil production is forecast to increase by 0.7 per cent, relative to 2011,

supported by capacity expansions in Iraq. Increased output from the Rumalia, Zubair andWest Qurna oil fields are expected to underpin growth Iraqs crude oil production. Production

capacity in Iraq is expected to reach 3 million barrels a day by the end of 2011 and 3.3 millionbarrels a day by the end of 2012. However, production and exports may be constrained by

bottlenecks in export capacity, including pipelines and single-point moorings.

OPEC production of natural gas liquids and condensate is estimated to grow by 9 per cent in2011, relative to 2010, and an additional 7 per cent in 2012 to average 6.3 million barrels a day.

Production increases are likely to continue to be sourced from Qatar through the development

of large gas fields.

Growth in non-OPEC production in 2012

Non-OPEC oil production is estimated to increase moderately in 2011, growing by 0.3 percent relative to 2010, to average 52.8 million barrels a day. In 2012, oil production is forecast to

increase by 2 per cent to average 53.9 million barrels a day, reflecting an expected return toproduction following maintenance, weather-related disruptions, and the start-up and ramp-up

of new oil fields.

North American oil production is estimated to increase by 2 per cent in 2011, relative to 2010,to average 14.4 million barrels a day. A further increase of 2 per cent is forecast for 2012. The

increase will be supported by the development of unconventional oil sources including oilsands in Canada and oil shale in the US.

Canadas oil production is estimated to increase by 3 per cent in 2011, relative to 2010, and

forecast to increase by 5 per cent in 2012 to average 3.8 million barrels a day. Productiongrowth will be supported by the start-up and ramp-up of oil sands projects including the

Firebag project in Athabasca (62 500 barrels a day) and the Kearl oil sands project (345 000barrels a day). Increases in production are also expected to be supported by the restart of the

Horizon sands facility (110 000 barrels a day), which reopened in August 2011 following a fireearlier in the year.


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In the US, oil production is estimated to increase by 3 per cent in 2011, as continued growth

in oil shale, particularly from the Bakken and Eagle Ford formations, offset weather-relateddeclines in production in North Dakota and the Gulf of Mexico. In 2012, US oil production is

forecast to grow by a further 1.9 per cent to average 8.1 million barrels a day.

Oil production in the Russian Federation is estimated to increase by 1.1 per cent in 2011, relativeto 2010, and forecast to increase by an additional 0.9 per cent in 2012 to average 10.7 million

barrels a day. Increased production from the ramp-up of the Vankor oil field is forecast tooffset production declines from maturing fields. Production from Russia is also expected to

be supported by the 6066 Tax Regime, which came into effect in October 2011. The reformreduces the marginal tax for crude oil exports from 65 per cent to 60 per cent, enhancing the

profitability of upstream projects.

Oil production in Brazil is estimated to increase by 3 per cent in 2011, relative to 2010, to

average 2.2 million barrels a day. Higher production will also be supported by a new well inthe Jubarte field and a ramp-up of production in the Lula field. In 2012, Brazils oil production

is forecast to increase by a 6 per cent to average around 2.3 barrels a day. Several new projectsin Brazils Campos Basin including the Peregrino and Marlin Sul 3 operations are expected to

contribute an additional 200 000 barrels a day once they reach peak capacity in early 2012.

Value of Australian oil exports to increase

Australian crude oil and condensate production is forecast to increase by 2 per cent in 201112,relative to 201011, to total 25.3 billion litres. Increased production from the North West Shelf(NWS) following the completion of the Cossack Wanaea Lambert Hermes redevelopment

project in September 2011 and the start-up and ramp-up of new projects in the Timor Seaare expected to offset declining output from maturing oil fields. New projects include the

Kitan project, completed in October 2011, and the Montara/Skua project, which is expected tocommence in the first quarter of 2012. Each project is expected to contribute 35 000 to 40 000

barrels a day at peak capacity.

Australian exports of crude oil and condensate are forecast to increase by 6 per cent in 201112to total 20.8 billion litres, in line with greater production off the north-west coast of Australia.

The value of Australias exports is forecast to increase by 21 per cent in 201112 to total $14.2billion, supported by higher export volumes and prices.


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Figure3: Australia'scrudeoilandcondensateexports

Sources: BREE; ABS.

Table1: Oiloutlook

2010 2011 s 2012 f % change

World

Production b mbd 87.5 88.8 90.5 1.9

Consumption mbd 88.3 89.2 90.5 1.4

Trade weighted crude oil

price US$/bbl 78 108 109 1.5

West Texas Intermediate crude

oil price US$/bbl 79 95 100 4.5

Australia 200910 201011 201112 f

Crude oil and condensate

Production b ML 25 583 d 24 793 d 25 340 2.2

Exports ML 18 064 19 636 20 806 6.0

value A$m 9 534 11 772 14 214 20.7

Imports ML 27 284 31 766 31 057 2.2

LPG

Production c ML 4 097 3 907 4 145 6.1

Exports ML 2 776 2 471 2 553 3.3

value A$m 1 105 1 068 1 246 16.7

b One megalitre a year equals about 17.2 barrels a day. c Primary products sold as LPG. d Energy Quest.

f BREE forecast. s BREE estimate.

Sources: BREE; ABARES; Australian Bureau of Statistics; Energy Information Administration (US Department of

Energy); Energy Quest; International Energy Agency.

GL

5

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25

volume

2011-122009-102007-082005-062003-042001-02

201112A$b

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15

value


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Australian gas exports

LNG export value to increase in 201112

In 201112, Australian liquefied natural gas (LNG) exports are forecast to decrease slightly to19.9 million tonnes. The decreased production is due to planned maintenance at the NWS

project taking place in September 2011. However, this decreased production is expected to bealmost completely offset by initial production from the Pluto LNG project, which is scheduled

to start in March 2012.

LNG prices under long-term contracts are typically linked to oil prices. As a result in 201011,higher oil prices in the first half of 2011 and increased export volumes increased the value ofAustralias LNG exports by 34 per cent relative to 200910 to $10.4 billion. In 201112, forecast

higher oil prices are expected to underpin a 15 per cent increase in the value of Australias LNGexports to $12 billion, despite the slight forecast decrease in export volumes.

Figure4: AustraliasLNGexports

Sources: BREE; ABS.

Table2: Australiangasoutlook

200910 201011 201112 f % change

Australia

Production Gm3 49.0 53.4 56.5 5.8

LNG exports Mt 17.87 19.96 19.90 0.3

value A$m 7 789 10 437 11 978 14.8

f BREE forecast.

Sources: BREE; ABARES; Department of Resources, Energy and Tourism.

Mt

5

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15

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25

volume

2011-122009-102007-082005-062003-042001-02

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Thermal coal

Rubhen Jeya

In 2012, average thermal coal prices are forecast to be lower than in 2011. However, they

will remain at historically high levels as import demand remains relatively robust.

World thermal coal imports in 2012 are forecast to increase by 4 per cent, relative to 2011,underpinned by growth in India, China and Japan.

Growth in world thermal coal exports is expected to be underpinned by increased

supplies from Australia, Colombia and Indonesia.

Australias thermal coal exports are forecast to increase in 201112 by 14 per cent, relativeto 201011, reflecting significant additions to production and export infrastructure

capacity over the course of 2011.

Thermal coal spot prices stay relatively steady

In 2011, thermal coal spot prices (on a Newcastle FOB basis) are estimated to average aroundUS$122 a tonne, an increase of 23 per cent compared to 2010. The increase in prices has been

supported by relatively strong demand from Asian economies and weather-related productiondisruptions in Australia, Indonesia and Colombia in the first half of 2011. In 2012, Newcastle spot

prices are forecast to remain high, underpinned by growth in demand in Japan, China andIndia. While spot prices are forecast to remain historically high, they are forecast to average

6 per cent lower than in 2011, reflecting strong growth in exports from Australia and Indonesia.

In line with lower spot prices, Australia-Japan thermal coal contract prices are assumed tosettle at around US$110 a tonne for Japanese Fiscal Year 2012 (JFY, April 2012 to March 2013). If

achieved, this would result in a JFY 2012 price that is 15 per cent lower than the JFY 2011 price,which was around US$130 a tonne.

Thermal coal imports to increase

In 2011, world thermal coal trade is estimated to total 817 million tonnes, an increase of3 per cent from 2010. The increase in trade has been supported by strong import growth,

particularly from India. The import growth in the Asian region has been underpinned byexport growth from Australia, the US, Indonesia, the Russian Federation and Colombia. Import

demand in the Atlantic market has remained subdued in 2011, reflecting weak demand inEurope and a growing shift towards alternative and renewable energy sources.

World thermal coal trade in 2012 is forecast to increase by around 4 per cent to 852 million

tonnes, supported by continued strong import demand from Asia combined with a moderateincrease in European import demand. Indonesia and Australia are forecast to supply a

significant proportion of the growth in seaborne thermal coal trade.


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Chinas imports to increase in 2012

In the first eight months of 2011, China imported around 78 million tonnes of thermal coal,which was largely unchanged from the corresponding period in 2010. The lack of import

growth reflects high international coal prices that improved the competiveness of domesticallyproduced coal and that reduced the incentive to import thermal coal in the first half of 2011.

Additionally, high levels of stockpiles at ports and at power stations placed downward pressureon coal demand for much of the second half of 2011. For 2011 as a whole, China is estimated to

import around 126 million tonnes of thermal coal, a 2 per cent decrease from 2010.

In 2012, Chinas thermal coal imports are forecast to increase by 2 per cent, relative to 2011,to 128 million tonnes. The moderate increase in imports reflects a forecast reduction in

international coal prices, which would enhance the competiveness of imports compared withdomestically produced coal.

.while Indias import growth to continue to grow strongly in 2012

In 2011, Indias coal consumption has increased strongly, underpinned by the start-up of anumber of coal-fired power stations. However, the growth in Indias coal production has not

been enough to keep pace with growth in consumption and this has resulted in an increase inimports to make up the balance. Also supporting imports in 2011 has been the need to blend

domestically produced coal with higher quality imported coal, which helps to increase theefficiency of electricity generators. Reflecting these developments, Indias imports of thermal

coal in 2011 are estimated to increase by 30 per cent, relative to 2010, to 78 million tonnes.

In 2012, Indias thermal coal imports are forecast to increase by 18 per cent, compared to 2011,to total 92 million tonnes. Growth in thermal coal imports is expected to be underpinned bycontinued expansion of coal-fired electricity generation capacity and production growth not

sating additional demand.

Japan and the Republic of Koreas imports to increase

In 2011, Japans imports are estimated to have decreased by 3 per cent, relative to 2010, to125 million tonnes. The decrease in imports reflects damage to a number of coal-fired power

stations from the March 2011 earthquakes and tsunami. This was partially offset by an increase

in capacity utilisation at unaffected coal-fired power stations.

Japans thermal coal imports in 2012 are forecast to increase by 2 per cent to 128 million tonnesunder the assumption that some of the damaged power stations will restart operation in

2012. Japans electricity demand is expected to rise in 2012 in response to increased economicactivity associated with the reconstruction phase. In addition, nuclear power utilisation is

assumed to remain at low rates for much of 2012. Reflecting these developments, coal-firedelectricity generation is expected to operate at a high utilisation rate, underpinning thermal

coal imports.


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Figure1: Japanselectricitygeneration

Source: Ministry of Economy, Trade and Industry, Japan.

Europes thermal coal imports to rise moderately

In 2011, the European Union's (EUs) thermal coal imports are estimated to have increased

by around 3 per cent, relative to 2010, to total 155 million tonnes. This increase has beenunderpinned by imports into the United Kingdom, where thermal coal imports are estimated

to have increased by 54 per cent to 19 million tonnes in the first nine months of 2011. Theincrease in imports into the United Kingdom reflects disruptions to gas supplies from the

North Sea which encouraged the use of coal for electricity generation.

Imports into the EU in 2012 are forecast to increase by around 1 per cent, relative to 2011, to157 million tonnes. Weak economic growth across the region is expected to limit growth in

coal-fired electricity generation. In addition, gas supplies from the North Sea are assumed toreturn to normal levels, which could put downward pressure on the United Kingdom's demand

for imported coal. However, the continued and gradual closure of Germany's coal mines is onefactor that may support the EU's thermal coal import demand.

Exports from Indonesia and the Russian Federation increasing

In the first eight months of 2011, Indonesias exports of thermal coal increased by 4 per cent,compared with the corresponding period in 2010, to 206 million tonnes. The increase in

exports was underpinned by higher production associated with favourable weather conditionsin the first half of the year. Indonesias exports are estimated to increase by 5 per cent to 298

million tonnes in 2011.

GWH

10000

20000

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NuclearThermalHydro Power

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In 2012, Indonesias exports are forecast to increase by a further 3 per cent to 306 million

tonnes, underpinned by import demand from China, India and emerging Asian economies.The increase in exports is expected to be supported by increased production from PT Bumis,

PT Adaro Energys and PT Indika Energys coal mines along with output expansions from mines

located in the East Kalimantan region.

while US exports decline in 2012

In the first eight months of 2011, thermal coal exports from the Unites States increased by68 per cent year-on-year to total around 22 million tonnes. During this time, exports to Europe

increased by more than 150 per cent to around 10 million tonnes, while exports to Asiadoubled to around 7 million tonnes. The strong increase in exports reflected high international

coal prices and relatively weak coal demand in the US associated with increased consumptionof natural gas and renewables for electricity generation. For 2011 as a whole, US exports are

forecast to increase by 35 per cent to 31 million tonnes.

In 2012, US thermal coal exports are forecast to decrease by 11 per cent, relative to 2011, to total28 million tonnes as import markets will continue to source coal from traditional producers,

such as Australia, Indonesia and Columbia, thereby reducing demand for thermal coal exportsfrom the US. Further increases in US thermal coal exports are expected to be limited by the

availability of port and rail infrastructure.

Figure2: USexportstovariousregions

Mt

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Exports to AsiaExports to EUExports to Americas

Jul-11

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1

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0

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Growth in exports from South Africa and Colombia in 2012

During the first nine months of 2011, South Africas exports of thermal coal declined by about3 per cent year-on-year to 49 million tonnes. The decrease in production reflected weak import

demand in the Atlantic market and weather related disruptions in the first half of 2011. For 2011as a whole, South Africas exports of thermal coal are forecast to decline by 3 per cent, relative

to 2010, to around 66 million tonnes.

In 2012, thermal coal exports from South Africa are forecast to increase by 5 per cent to69 million tonnes. This growth reflects the assumption that production will not be disrupted by

industrial action or bad weather, as it was in 2011. However, further increases in South Africasthermal coal exports are expected to be limited by infrastructure bottlenecks, particularly

within the rail system.

In the first nine months of 2011, Colombias exports of thermal coal increased by 5 per centfrom the previous corresponding period to 56 million tonnes. The increase in exports was

underpinned by growth in production in the Cesar Basin, including Glencores Pordeco mineand the Cerrejon and Drummond coal operations. For 2011 as a whole, Colombias thermal coalexports are estimated to increase by 3 per cent to 71 million tonnes.

In 2012, Colombias thermal coal exports are forecast to increase by 6 per cent, relative to 2011,

to 76 million tonnes. The increase in exports is expected to be supported by higher productionfrom mines which commenced operations in 2011.

Australias thermal coal exports to increase in 201112

In 201112, Australias thermal coal production is forecast to increase by 9 per cent, relative to201011, to 225 million tonnes. Supporting Australias thermal coal production will be increases

in production for a number of new coal mines that started up in 201011. New projects locatedin New South Wales include Mangoola (8 million tonnes a year) and Moolarben stage 1 (8 million

tonnes a year), and the expansion of the Mount Arthur North open-cut mine (3.5 million tonneexpansion). In Queensland, the start-up of the Ensham underground mine (1.5 million to

2.5 million tonnes a year) will also contribute to Australias thermal coal production.


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Figure3: Australiasthermalcoalexports

Sources: BREE; ABS.

In 201112, Australias thermal coal export volumes are forecast to increase by 14 per cent,relative to 201011, to total 163 million tonnes. The growth in export volumes will be supportedby increased port capacity associated with the start-up of the Port Waratah Coal Services

Kooragang Island Coal Terminal expansion (11 million tonnes a year), the X50 expansionat Abbot Point (25 million tonnes a year) and higher throughput at the Newcastle Coal

Infrastructure Group Coal Terminal as it approaches capacity.

In 201112, the value of Australias thermal coal exports is forecast to increase by 34 per cent,relative to 201011, to $18.8 billion, supported by higher export volumes.

Mt

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Table1: Thermalcoaloutlook

2010 2011 s 2012 f % change

World

Contract prices b

Thermal coal US$/t 98 130 110 15.3

Coal trade Mt 794 817 852 4.3

Imports

Asia Mt 532 552 581 5.2

China Mt 129 126 128 2.0

Chinese Taipei Mt 65 67 67 0.6

India Mt 60 78 92 17.9

Japan Mt 129 125 128 2.4

Korea, Rep. of Mt 91 94 95 1.1

Malaysia Mt 19 20 21 7.1

other Asia Mt 40 43 50 15.6

Europe Mt 193 199 202 1.6

European Union 27 c Mt 150 155 157 0.8

other Europe Mt 43 43 45 4.4

Other Mt 70 65 68 4.4

Exports

Australia Mt 141 148 171 15.5

China Mt 20 15 13 12.0

Colombia Mt 69 71 76 6.4

Indonesia Mt 285 298 306 2.7

Russian Federation Mt 95 97 99 1.5

South Africa Mt 68 66 69 4.5

United States Mt 23 31 28 10.6

Other Mt 94 85 83 2.4

200910 201011 201112 f

Australia

Production Mt 198.3 206.1 224.7 9.0

Exports Mt 135.0 143.3 162.6 13.5

value A$m 11 886 13 956 18 760 34.4

b Japanese Fiscal Year, starting April 1, fob Australia basis, BREE AustraliaJapan average contract price

assessment. For steaming coal with a calorific value of 6700 kcal/kg (gross air dried. c Regarded as 27

countries for all years. f BREE forecast. s BREE estimate.Sources: BREE; ABARES; International Energy Agency; Coal Services Pty Ltd; Queensland Department of Mines and Energy.


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Resources outlook

Steel and steel-making raw materials

Rubhen Jeya and Tom Shael

In 2012, iron ore contract prices for 62 per cent iron content shipped from Australia areforecast to average around US$139 a tonne, 9 per cent lower than the estimate for 2011. In

the same period, contract prices for high-quality hard coking coal are forecast to averageUS$226 a tonne, a 22 per cent decrease from 2011. These decreases reflect an increase in

supply of both of these commodities on the seaborne-traded market.

Demand for steel and its raw material inputs, iron ore and metallurgical coal, are forecast to

increase in 2012. However, this growth is expected to be relatively subdued due to slowerworld economic growth.

In 201112, Australias metallurgical coal exports are forecast to increase by 7 per cent,relative to 201011, to total 150 million tonnes. Iron ore exports are forecast to increase

by 13 per cent to total 460 million tonnes. For both steel-making materials, higher exportvolumes will more than offset lower contract prices for 201112, resulting in a 13 per cent

increase in export earnings for metallurgical coal and a 12 per cent increase for iron ore.

Raw material prices

Iron ore spot prices have declined markedly since October 2011 due to expectations aboutslow growth in the world economy, continued debt issues in Europe and a slight reduction in

growth in China. However, strong prices in the June and September quarters of 2011 bolsteredthe average 2011 contract price for 62 per cent iron content ore shipped from Australia to

US$153 a tonne, a 36 per cent increase compared to 2010.

In 2012, recently completed projects in Australia are expected to increase seaborne supply,which, in combination with relatively weaker growth in demand from steel producers in Asia

and Europe, is forecast to place downward pressure on iron ore prices. As a result, the 2012contract price is forecast to average around US$139 a tonne, a 9 per cent year-on-year decline.

Contract prices for premium quality hard coking coal averaged US$289 a tonne in 2011,representing a 52 per cent increase on the average contract price in 2010. This increase partlyreflects weather related production disruptions in Queensland in late 2010 and early 2011 that

coincided with relatively strong steel production in China and in Japan, prior to the March 2011earthquakes and tsunami.


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In 2012, contract prices are forecast to decrease by 22 per cent to average US$226 a tonne. This

decrease reflects a combination of weaker import demand growth and increased exports fromQueensland as mines recover from flood-related production disruptions. In addition, increased

supply from a number of metallurgical coal expansions around the world that have recently

been completed, or are scheduled for completion within the outlook period, are expected toplace downward pressure on prices.

Figure1: Steel-makingrawmaterialcontractprices(FOBAustralia)

Source: BREE.

2011US$/t

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semi-soft cokinghard cokingiron ore (62% iron content)

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Steel

Table 1: World steel outlook

2009 2010 2011 s 2012 f

Crude steel consumption (Mt)

European Union 27 129 160 166 171

United States 62 90 94 97

Brazil 21 30 31 33

Russian Federation 28 42 44 46

China 571 600 624 662

Japan 57 68 69 76

Korea, Rep. of 47 55 56 57

Chinese Taipei 14 21 24 25

India 61 66 76 84

World steel consumption 1223 1389 1451 1527

Crude steel production (Mt)

European Union 27 139 173 177 181

United States 58 81 86 90

Brazil 27 33 35 38

Russian Federation 60 67 69 72

China 568 627 683 734

Japan 88 110 108 122

Korea, Rep. of 49 58 62 64


India 57 67 72 78

World steel production 1220 1415 1502 1594

f BREE forecast. s BREE estimate.

Sources: BREE; World Steel Association.


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In2011, world steel consumption is estimated to increase by 4 per cent to 1.45 billion tonnes.

The worlds three largest steel consumers, China, the European Union (EU) and the US, allrecorded consumption growth. However, this growth has been moderate, and reflects weak

economic activity in the second half of 2011 relative to the first half of 2011.

World steel consumption in 2012 is forecast to increase by 5 per cent, relative to 2011, to1.5 billion tonnes. China and Japan will be the main contributors to consumption growth, while

growth in the EU and US will be subdued, reflecting assumed weak economic growth.

China to remain the largest producer and consumer of steel in 2012

In 2011, Chinas steel consumption is estimated to increase by around 4 per cent to a total of

624 million tonnes, which is equivalent to around 43 per cent of world steel consumption.This increase in consumption reflected the effect of growth in infrastructure development

and other steel-intensive infrastructure, particularly in the first half of 2011. Also supportingsteel consumption growth in China was the commencement of a social housing construction

program that will consist of building 10 million units of affordable housing.

In 2012, Chinas steel consumption is forecast to increase by 6 per cent, relative to 2011, to662 million tonnes. Growth in steel consumption is expected to be underpinned by programs

to expand infrastructure and social housing construction.

In OECD economies, steel production has increased during 2011. However the rate ofgrowth has been lower than the growth rate seen in 2010. In both the US and the EU, steel

consumption is estimated to increase by 4 per cent year on year. In Japan, steel consumptionin 2011 is estimated to increase by one per cent, relative to 2010, to 69 million tonnes. Lowerconsumption in the first half of 2011 following the March 2011 earthquakes and tsunami

was offset by growth in the second half of 2011 from the commencement of rebuilding ofdamaged infrastructure.

In 2012, reduced government spending and investment in infrastructure in a number of large

European economies and in the US is expected to result in relatively slow growth in OECDsteel consumption. Steel consumption in both the US and the EU is forecast to increase by

3 per cent, year-on-year, to 97 million tonnes and 171 million tonnes, respectively. In Japan,steel consumption in 2012 is forecast to increase by 10 per cent, relative to 2011, to 76 million

tonnes as a result of a significant amount of rebuilding activity across earthquake- andtsunami-affected regions.

World steel production in 2011 is estimated to have increased by 6 per cent, relative to 2010, to

1.5 billion tonnes, as steel producers responded to strong steel consumption in the first half of2011. In 2012, world steel production is forecast to increase by a further 6 per cent to 1.6 billion

tonnes.

Chinas steel production in 2011 is estimated to increase by 9 per cent, compared with 2010,to 683 million tonnes. The 56 million tonne increase represents around two-thirds of the total

estimated increase in world steel production. China maintained a high rate of steel productionthroughout most of the first three quarters of 2011 in response to increased steel demand.


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However, in the December quarter steel production is estimated to have declined as steel

consumption weakened and steel prices fell. In 2012, Chinas steel production is forecast toincrease by 7 per cent to 734 million tonnes. This relatively strong rate of production growth

reflects robust steel consumption growth, albeit at a rate weaker than in 2011.

In OECD economies in 2011, steel production increased by 6 per cent in the US and by 2 percent in the EU, although growth was still significantly lower than the growth rate experienced

between 2009 and 2010. In Japan, steel production is forecast to decline by 2 per cent in 2011,primarily as a result of production losses due to damage caused by the March 2011 earthquakes

and tsunami, which more than offset production increases in the second half of 2011.

In 2012, steel production in the OECD is forecast to increase, albeit at a moderate rate,reflecting weak consumption growth. In the US and the EU, steel production is forecast toincrease by 5 per cent and 2 per cent respectively. By contrast, Japans steel production in 2012

is forecast to increase by 13 per cent, compared to the previous year, to a total of 122 milliontonnes. The sharp increase in production will be required to meet a forecast increase in steel

demand associated with reconstruction following the March 2011 earthquakes and tsunami.

Iron ore

Table2: Worldironoretrade

2009 2010 2011 s 2012 f

Iron ore imports (Mt)

European Union 27 95 133 142 149

Japan 105 134 132 147

China 630 619 645 692

Korea, Rep. of 42 56 58 60


World imports 948 1055 1093 1172

Iron ore exports (Mt)

Australia 363 402 431 481

Brazil 266 311 330 361

India 117 96 85 76

Canada 31 33 34 35

South Africa 45 48 53 57

Sweden 16 21 21 22

World exports 948 1055 1093 1172

f BREE forecast. s BREE estimate.Sources: BREE; UNCTAD.


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In the first half of 2011, demand for iron ore imports was buoyed by higher steel production

particularly in China. However, lower steel production in China in the latter part of 2011reduced demand for imported iron ore. For 2011 as whole, world trade of iron ore is estimated

to increase by 4 per cent, relative to 2010, to 1.1 billion tonnes.

In 2012, iron ore imports are forecast to increase further, reflecting steel production growth inChina and Japan. World trade of iron ore in 2012 is forecast to increase by 7 per cent, relative to

2010, to 1.2 billion tonnes.

China remains a major importer of iron ore

China is estimated to import 645 million tonnes of iron ore in 2011, representing a 4 per cent

increase over 2010 levels. While domestic iron ore production increased by an estimated 9 percent in 2011, it was insufficient to meet growth in iron ore demand. Further increases in China's

iron ore production were limited by high cost and relatively low quality ores.

In 2012, Chinas imports of iron ore are forecast to increase by 7 per cent, relative to 2011,to total 692 million tonnes. The faster rate of growth reflects expected weaker domestic

production. With iron ore prices forecast to decline, this will result in high cost Chinese minesclosing down and their production being substituted for with imports, which can be produced

at a lower cost.

Imports into developed economies to moderate

In OECD economies, iron ore imports in 2011 are estimated to have increased by 3 per cent,relative to 2010, to 332 million tonnes, largely underpinned by growth in imports into the EU. In2011, EU imports are estimated to increase by 7 per cent to 142 million tonnes reflecting higher

steel production. In Japan, iron ore imports in 2011 are estimated to decrease by 1 per cent,relative to 2010, to total 132 million tonnes. The decline in imports reflects the decrease in steel

production in 2011 immediately following the earthquakes and tsunami.

In 2012, OECD iron ore imports are forecast to increase by 7 per cent, relative to 2011, to356 million tonnes. Japans iron ore imports are forecast to increase by 11 per cent, relative to

2012, to 147 million tonnes, underpinned by forecast growth in its steel production. Growth inEU imports in 2012 is forecast to moderate to 5 per cent, relative to 2011, as steel production

growth slows.

Australia and Brazil to continue dominating world seaborne trade in 2012

While exports from the major iron ore exporting countries have increased in 2011, a ban on

production from the Indian state of Karanataka and weather related supply disruptions inWestern Australia have limited further growth of iron ore exports. In 2012, forecast growth in

exports from Australia and Brazil, is expected to underpin the growth in world iron ore exports.


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Australias iron ore exports in 2011 are estimated to increase by around 7 per cent, relative to

2010, to 431 million tonnes as weather-related supply disruptions in Western Australia in thefirst half of the year limited growth. Nevertheless, the growth in exports was supported by the

start-up of new projects including from Fortescues Chichester Hub expansion.

In 2012, Australia's iron ore exports are forecast to increase by 12 per cent, relative to 2011, tototal 481 million tonnes. Increased exports in 2012 are expected to be supported by increased

production from a number of projects which started up in 2011 or are scheduled to start-upin 2012. These include Mt Gibson Irons Extension Hill Direct Shipping Ore (DSO) project,

Rio Tintos Hamersley Iron Brockman 4 (Stage 2), BHP Billiton's Rapid Growth 5 project, andFortescue Metals Groups expansion at Chichester Hub.

Brazil's iron ore exports in 2011 are estimated to have increased by 6 per cent, relative to 2010,to total 330 million tonnes. This growth is underpinned by record production from Vales

Carajas operation, following the completion of a 10 million tonne annual capacity expansionin 2010. In 2012, Brazils exports are forecast to increase by a further 9 per cent, relative to 2011,

to total 361 million tonnes, underpinned by full capacity production across many operations,including those in the south-eastern, southern and northern systems.

In July 2010, a ban on production from the state of Karnataka, which accounted for about

one-quarter of Indias total iron ore production, was put in place by the Indian governmentin an attempt to stop illegal mining. While the ban was partially lifted in some regions in

August 2011, losses in production in the first-half of 2011 negatively impacted Indias iron oreexports. As a result, Indias iron ore exports for 2011 are estimated to have declined by 11 per

cent, relative to 2010, to total 85 million tonnes. Reflecting the assumption that legislative

uncertainties and production losses will continue throughout 2012, Indian exports are forecastto decrease by a further 11 per cent to total 76 million tonnes.

Australian exports

In 201112, Australias exports of iron ore are forecast to increase by 13 per cent, relative to

201011, to total 460 million tonnes, largely as a result of higher production at projects in thePilbara region of Western Australia. Australian export earnings from iron ore in 201112 are

forecast to increase by 12 per cent, compared to 201011, to total $60.4 billion. Higher exportvolumes and contract prices in the second half of 2011 will more than outweigh the forecast

lower contract prices for the first half of 2012.


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Documents

Resources and Energy Quart Jan 2012