Grim forecast for record energy exports
Australia’s earnings from resources and energy exports is facing an astronomical hit as global demand slows and markets stabilise.
Australia’s resources and energy export earnings face a $68bn hit, with record LNG and thermal coal prices expected to fall on the back of a slowdown in global demand and easing of supply-chain disruptions.
New forecasts show commodity prices on track to return to pre-pandemic levels as markets stabilise following Russia’s invasion of Ukraine, heaping pressure on Treasurer Jim Chalmers, who has warned of looming budget spending blowouts and revenue shortfalls.
Despite a sharp slide in global economic growth, export projections released on Monday by the Office of the Chief Economist and Department of Industry and Resources reveal that Australia is on track to notch a record $459bn in 2022-23 earnings.
However, the upgraded forecasts predict resources and energy export earnings will fall to $391bn in 2023-24, adding stress to the nation’s debt and deficit explosion over the decade and projected $11bn in higher deficits in 2024-25 and 2025-26.
Stronger export returns could be achieved if China continues easing draconian Covid-19 restrictions and uses fiscal levers to take advantage of low inflation and accelerate economic development.
Heated competition between Japanese and European importers for high-quality Australian thermal coal, higher oil prices and the end of the La Nina weather pattern early next year could also help boost exports over the next 18 months.
The Commonwealth is assuming “significant growth in planned investment” across the resources sector despite industry concerns the sweeping energy market intervention – imposing a $12-a-gigajoule gas price cap and $125-per-tonne coal price cap for 12 months – will impact forward investment.
LNG export revenues are forecast to hit $90bn in the current financial year before falling to $75bn in 2023-24. LNG earnings in the September quarter soared to $25bn, the highest return on record and close to matching yearly export earnings in 2020-21.
Australia’s LNG export volumes, which have swelled to fill global supply shortfalls triggered by the war in Ukraine, are predicted to decline over the next year before stabilising at around 81 million tonnes in 2024.
The Albanese government, which is considering an overhaul of the petroleum resource rent tax targeting oil and gas profits, has promised key trading partners, including Japan, South Korea and India, that exports will not be impacted by the energy market intervention.
Despite the global appetite for Australian thermal coal, 33 major coal projects remain stalled as lenders and investors, led by pension and equity funds, withdraw finance for new thermal coal projects.
Thermal coal exports are on track to exceed $75bn by June 30 before retreating to pre-pandemic levels as gains in world supply bring down prices.
A resources and energy major projects report, also released on Monday, reveals a massive surge in investment for clean energy and critical minerals projects.
In the 12 months to October, the number of resources and energy projects increased from 367 to 423 and projects where a final investment decision has been taken rose by 53 per cent to $83bn.
Lithium has emerged as Australia’s sixth-largest export commodity, with the government projecting a tenfold increase in export earnings over two-years, rising from $1.1bn in 2020-21 to $17bn in 2023-24.
Future growth is expected to feed global demand for electric vehicles and batteries.
Resources Minister Madeleine King said the forecasts “underline the importance of the resources and energy sector to Australia’s economic wellbeing, accounting for around 10 per cent of GDP and directly employing more than 250,000 men and women, mostly in regional Australia”.
Ms King said while energy prices had eased in recent months, they “generally remain well above levels prior to Russia’s war on Ukraine”.
“Demand for minerals crucial to new low-emissions technology, such as lithium, copper and nickel, remains strong and is supporting prices,” Ms King said.
“These materials, along with other critical minerals and rare earths, will be crucial to low-emissions technologies such as batteries, solar panels and electric vehicles, and will help Australia and the world to meet net-zero commitments by 2050.”
Oil and gas projects – which companies and industry leaders have warned will be negatively impacted in the long-term by the energy market intervention – continue to drive the nation’s investment pipeline.
“The continuing growth in value of projects at this stage was driven by oil and gas projects,” a resources and energy major projects report said.
“New or progressed projects in the publicly announced and feasibility stages are dominated by hydrogen and iron ore projects.”
Since November last year, 30 major projects were completed, with the total value rising from $10.1bn to $13.6bn following the finalisation of several iron ore projects. More than $30bn was committed to oil, gas and LNG projects, including Scarborough, the Pluto expansion and Crux LNG in Western Australia.
Two gas pipeline projects on the east coast, valued at $400m, were also locked in.
Western Australia remains the largest destination for resources and new energy projects, with the state boasting “sizeable reserves of lithium and gold, which have both enjoyed high Australian dollar returns in 2022”.
Rapid growth in clean-energy mining projects and critical minerals extraction have led a boom in exploration across the country.
While weakness in world steel output and the Chinese property market has dampened iron ore demand, the government says the “risks to the forecast for Australia’s export earnings in 2022–23 and 2023–24 are fairly evenly skewed”.
“Markets have priced in weaker world economic growth and the loss of some Russian resource and energy commodity output from world supply in 2023,” the export earnings report said.
“Should world economic growth (especially in China) hold up better than expected and/or non-Russian commodity supply fails to rise as expected, our export earnings could exceed current forecasts.
“If Russia cuts exports of oil and oil products in response to the imposition of price caps, oil prices could lift sharply. Higher oil prices would lift Australia’s LNG revenues — since most LNG sales are linked to the price of oil — but would adversely impact world economic growth.
“(LNG) earnings are estimated to reach $23bn in the December 2022 quarter, as rising export volumes partially offset the impact of falling spot prices. For 2022–23, exports are forecast to reach $90bn.
“However, earnings are forecast to ease to $75bn in 2023–24, as US supply rises and markets reorganise further.”
The report said “a substantial widening in Covid lockdowns in China poses a downside risk to Australia’s export earnings, especially our exports of base and ferrous metals”.
“The iron ore price has steadied, and remains well above the November 2021 cycle low. Weak Chinese demand has added to the impact of improved supply in major exporting nations,” it said.
Prices are likely to ease further over the outlook period, as world supply gains faster than world demand.
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