By Robb M. Stewart
MELBOURNE, Australia--Australia is set to reap record earnings from commodity exports this fiscal year, although that likely marks a peak as cooling demand from China's steel sector and rising global supplies weigh on prices for coal and iron ore, the government forecasts.
Prices for iron ore and metallurgical coal, both used to produce steel, and for thermal coal used by power stations are expected to fall in the next two years. That weakness is set to be more than offset by rising volumes in the current year but will overwhelm the effect of volumes on export earnings the following year, according to a government report released Friday.
An anticipated drop in 2019 revenue would come despite rising earnings from shipments of liquefied natural gas, which is set to overtake metallurgical coal as Australia's most valuable commodity export behind iron ore next year, the Department of Industry, Innovation and Science said in a quarterly bulletin.
After surging last year on the back of a sharp rebound in prices for iron ore and metallurgical coal, earnings from commodity exports will rise 3.3% to an all-time high 210.8 billion Australian dollars (US$165.8 billion) in the year through June, the department forecast. But earnings are set to fall 4.6% the following year, to A$201.2 billion.
The country benefited strongly during the last fiscal year and into the current year from surging prices for iron ore and metallurgical coal, although the gains have faded in recent weeks.
In the July-September quarter, the value of resources and energy exports grew by more than 25% year-over-year, the government report said. It said the growth was driven largely by China's steps to restrict domestic coal production from mid-2016 to reduce losses in its industry and as Chinese iron-ore production weakened just as its steel input demand recovered over the latter half of 2016 into 2017. Prices for coal and iron ore received a further boost over the last fiscal year after bad weather disrupted Australian shipments.
However, the average price for Australia's commodity exports is forecast to weaken 4.3% this fiscal year and by a further 11% the year after, as China's steel sector loses some of its recent buoyancy and the global supply of bulk commodities picks up, the government said. Demand for the country's commodities is also set to moderate after a relatively strong year in 2017, with the consumption of steelmaking commodities that currently make up almost half of Australia's resources exports growing more slowly.
At the same time, global demand for energy commodities is likely to pick up modestly in 2018 as world economic growth firms and with a modest recovery in Chinese energy consumption, the quarterly report said. For Australia, that demand will be most noticeable in LNG, which the government expects will advance at an annual 9.35% between 2016 and 2019.
Massive LNG plants around Australia have positioned the country to leapfrog Qatar as the world's leading exporter of the fuel in the next few years. But this has contributed to rising prices and a forecast shortfall of natural-gas supplies along the eastern seaboard. Under threat of government curbs on LNG exports, Royal Dutch Shell PLC and other producers have pledged to divert gas supplies to the local market that would otherwise be sold in global spot markets.
In the next two years, LNG export earnings are forecast to increase at an annual average rate of 26% to reach about A$35 billion in 2018-19, Mark Cully, the department's chief economist, said.
The government report noted signs that the fall in mining investment in recent years was coming to an end, though it said trends in exploration and expenditure don't point to an extension of the resource production book that's currently set to peak in late 2019.
Mining accounted for 6.9% of Australia's gross domestic product in fiscal 2017, and more than 8% of real GDP growth in the April-June quarter of 2017. The country's biggest market by far is China, followed by Japan, then South Korea and India.
Mr. Cully said the prospects for Indian mineral and energy use over the next 20 years are promising, yet won't be on the same scale that was seen from China over the past decade or so.
Write to Robb M. Stewart at [email protected]