Resources and Energy Quarterly March quarter 2012

Resources outlook

Steel and steel-making raw materials

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  Over the outlook period, assumed strong economic growth in emerging Asian economies and an economic recovery in most developed economies is expected to underpin growth in world steel consumption, and in turn steel production.
  
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  Growth in world steel production over the medium term is projected to support increased iron ore and metallurgical coal trade, particularly in Asian economies such as China, India, Japan and South Korea.
  
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  Australia’s iron ore and metallurgical coal export volumes are projected to increase at an average annual rate of 11 per cent and 8 per cent, respectively, out to 2016–17 due to significant capacity expansions which are currently under construction. The growth in export volumes is projected to result in export earnings (in 2011–12 dollars) in 2016–17 reaching $77 billion for iron ore and $30 billion for metallurgical coal.
  

In 2012, world steel consumption is forecast to increase by 4 per cent, relative to 2011, to 1.5 billion tonnes, supported by demand from the construction of infrastructure projects in many developing economies. Despite the increase in steel consumption, relative to 2011, the rate of growth is forecast to slow, in line with assumed weaker economic growth particularly across the OECD, but also in economies in non-OECD Asia and Latin America.

Emerging economies, particularly China and India, are expected to account for an increasing proportion of global steel consumption over the outlook period. In 2012, steel consumption in these countries is forecast to account for 49 per cent (739 million tonnes) of world consumption, and is projected to grow at an average annual rate of 4 per cent to reach 51 per cent (925 million tonnes) by 2017.

China is currently the world’s largest consumer of steel, accounting for an estimated 43 per cent of world consumption in 2011. Strong growth in steel consumption has been supported by the construction of public infrastructure and housing and manufacturing of consumer durables. In 2012, China’s steel consumption is forecast to increase by 5 per cent, relative to 2011, to total 657 million tonnes.

Over the remainder of the outlook period (2013 to 2017), China’s steel consumption is projected to increase due to significant government investment in steel-intensive infrastructure such as highways and rail networks that will link the less-developed provinces in western China to demand centres in the east. In addition, in the first half of the outlook period, China’s steel consumption is expected to be boosted by the construction of the first phase of the affordable social housing program, which aims to build 36 million units of subsidised apartments by 2015. Between 2013 and 2017, China’s steel consumption is projected to average 4 per cent a year to reach 812 million tonnes in 2017.

In 2012, India’s steel consumption is forecast to increase by 8 per cent, relative to 2011, to 82 million tonnes as robust economic growth underpins increases in government spending on infrastructure and higher consumption of consumer durables. Over the period 2013–2017, consumption growth is projected to increase at an average rate of 7 per cent a year with steel consumption reaching 113 million tonnes by 2017. Increases in India’s steel consumption is expected to be supported by government efforts to increase the coverage and quality of road, rail, electricity and other infrastructure, and the gradual increase in consumption of consumer durables in response to rising incomes. Over the medium term, these government initiatives are expected to raise India’s steel consumption per capita from their current relatively low levels.

In Brazil, steel consumption is projected to grow strongly over the outlook period, increasing at a projected average rate of 3 per cent a year to 38 million tonnes in 2017. The construction of infrastructure to host the 2014 FIFA World Cup and the 2016 Olympic Games is expected to provide strong support for steel consumption growth.

Over the medium term, steel consumption in OECD economies is projected to be slower than in the non-OECD economies, increasing at an annual average rate of 2 per cent. This lower growth relative to emerging economies is because of already well developed infrastructure and assumed much lower economic growth, particularly in Europe, and reduced government spending on infrastructure projects as part of European Union (EU) austerity measures over much of the outlook period.

Steel consumption in the US and the EU is projected to increase at an average annual rate of 3 per cent and 1 per cent, respectively, over the outlook period. In Japan, steel consumption is forecast to increase by 3 per cent a year over the outlook period. Increased steel consumption will be supported by rebuilding activity across its earthquake and tsunami affected regions in the first half of the outlook period. Japan’s steel consumption growth is projected to moderate in the second half of the outlook period as the rebuilding program moderates. In 2017, steel consumption in the EU, the US and Japan is projected to be, respectively, 176 million tonnes, 110 million tonnes and 83 million tonnes.

Rapid steel production growth in China, India and Brazil

In 2012, world steel production is forecast to increase by 5 per cent, relative to 2011, to 1.6 billion tonnes. Over the outlook period, global steel production is projected to grow at an average rate of 4 per cent a year, to reach 1.9 billion tonnes in 2017. The projected growth reflects both a return to near full production capacity in many OECD economies and strong growth in production in emerging economies.

The majority of additional production capacity is expected to occur in developing economies, particularly China and India, while strong growth is also projected in Brazil. The share of world production for China, India and Brazil is projected to increase from 52 per cent in 2011 to 56 per cent in 2017.

In 2012, China’s steel production is forecast to increase by 7 per cent, compared with 2011, to total 731 million tonnes. Over the period 2013–2017, China’s steel production is projected to grow to 901 million tonnes in 2017, representing average growth of 4 per cent a year. Despite the robust forecast, China’s steel production could be affected by a number of downside risks. Principal among these is that government initiatives outlined in the 12^th Five-Year Plan (2011–15) that include the creation of larger, more efficient steel producers, restrictions on steel capacity expansions and the upgrading of steel industry technology could, in the short term, reduce the expected growth in production.

Over the 5-year outlook period, India’s steel production is projected to increase at an average annual rate of 6 per cent, to reach 105 million tonnes in 2017. The increase in steel production is expected to be supported by both the public and private sectors. For example, by 2015 government-owned corporations Steel Authority of India Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) have significant expansion plans to increase combined production capacity by around 15 million tonnes across a number of states. Private steel producers also propose to increase their steel production, including Tata Steel, Essar Steel and Jindal Steel Power Limited (JSPL). In addition, the Indian Government is encouraging foreign investment in steel making, which is attracting responses from major international companies, including ArcelorMittal and South Korea’s POSCO. Possible downside risks to the expected growth in steel production include potential project delays caused by issues relating to land access and environmental approvals.

In OECD economies, only a moderate increase in steel production is projected over the outlook period. Steel production in the both the US and Japan is projected to grow at an average rate of 2 per cent a year, reaching 100 million tonnes and 119 million tonnes in 2017, respectively. Iron and steel capacity utilisation in the EU is expected to increase in line with the assumed increases in economic growth in 2013 and beyond. In the EU, steel production in 2012 is forecast to remain largely unchanged, relative to 2011, at 177 million tonnes. In 2011 and 2012 the European steel industry is operating well below capacity, but beyond 2013, some idled capacity is expected to restart with EU steel production expected to increase at an average annual rate of 2 per cent between 2013 and 2017 to total 191 million tonnes in 2017.

In 2011, iron ore contract prices averaged US$153 a tonne, an increase of 36 per cent relative to 2010. Spot prices (on a 62 per cent iron content basis, free-on-board Australia) in the March quarter 2012 are estimated to average around US$134 a tonne, an increase of around 3 per cent from the December 2011 average. The recent increase in prices reflects reduced iron ore exports from India, and some precautionary buying from steel producers in anticipation of seasonal weather related supply disruptions in Western Australia.

Over the remainder of 2012, iron ore prices are forecast to ease as production increases from new projects in Australia and growth in Asian steel production weakens. Further price decreases are expected to be limited by an expected reduction in exports from India. For 2012 as a whole, iron ore contract prices are forecast to average around US$140 a tonne (on a 62 per cent iron content basis, free on board Australia), or a decrease of 9 per cent compared with 2011.

Figure 1: Raw material contract prices, FOB Australia

Please refer to page 74 of the Resources and Energy Quarterly – March quarter 2012 PDF version.

Over the remainder of the outlook period (2013 to 2017), contract prices are projected to ease gradually, averaging US$109 a tonne (in 2012 dollars) in 2017 (see Figure 1). The projected fall in prices largely reflects the effect of considerable expansions to supply that are scheduled for completion over the medium term.

Prices for metallurgical coal in the March quarter were settled at around US$235 a tonne, a decrease of 18 per cent from the December quarter price of US$285 a tonne. The decrease in prices is largely a combination of weaker import demand growth from large steel producing economies and increased exports from Queensland as mines return to normal production rates after weather disrupted production in late 2010 and early 2011. These factors are expected to continue to negatively influence metallurgical coal prices for the remainder of 2012, resulting in a 23 per cent decrease in average contract prices year-on-year, to US$221 a tonne. Over the remainder of the outlook period, metallurgical coal prices are projected to moderate further with substantial supply increases from Australia, Canada, Mongolia and Mozambique.

Iron ore

In 2012, world trade of iron ore is forecast to increase by 7 per cent, relative to 2011, to reach 1.1 billion tonnes. Over the medium term, world iron ore trade is projected to increase at an annual average rate of 5 per cent, reaching 1.5 billion tonnes in 2017 (see Table 2). China’s imports are projected to continue to grow strongly, while the majority of growth in iron ore supply is expected to come from operations in Australia and Brazil.

China has been the world’s largest importer of iron ore since 2004, and this is expected to continue over the outlook period. In 2012, China’s imports of iron ore are forecast to increase by 11 per cent, compared with 2011, to total 713 million tonnes. The key factor determining Chinese imports in the short term is the speed at which domestic production capacity can come on line and the cost and quality of domestic production. China’s iron ore production tends to be of a low quality relative to imports and has a number of marginal mines with high marginal costs of production. As a result, the proportion of Chinese consumption supplied by imports can fluctuate substantially depending on China’s swing production, which depends on iron ore prices.

Over the medium term, Chinese steel producers are expected to increase their reliance on imported ore due to: declining quality of domestic reserves; an increasing number of steel mills are located in coastal regions with easy access to ports; and efforts are being made to increase the average grade of steel produced in China, that necessitates an increased demand for relatively high-quality iron ore imports from Australia and Brazil. Over the outlook period, China’s imports are projected to increase at an annual average rate of 5 per cent to reach 854 million tonnes in 2017, accounting for approximately 57 per cent of global imports.

Imports by other major iron ore consumers the Republic of Korea, the EU and Japan are expected to continue to increase in line with modest growth in steel production at an annual average rate, respectively, of 5 per cent, 2 per cent and 2 per cent over the outlook period.

In 2012, Australian exports are forecast to increase by 12 per cent from the previous year to total 493 million tonnes. The increase is supported by a forecast increase to production at a number of mines including those operated by Rio Tinto, and the ramp up of production at BHP Billiton’s Rapid Growth Project 5.

Expansions and greenfield developments in Australia are expected to account for the majority of growth in global iron ore exports over the outlook period. Australia’s exports of iron ore are forecast to increase at an annual average of 10 per cent over the outlook period, to total 779 million tonnes in 2017.

A number of mine projects are at various stages of planning and development that will contribute to Australia’s exports over the outlook period. Rio Tinto has committed to expanding its annual production by 58 million tonnes a year to 283 million tonnes by the second-half of 2013. A further expansion to 353 million tonnes a year could be completed by mid-2015. BHP Billiton recently completed its Rapid Growth Project 5 and is in the process of ramping up the 50 million tonne expansion. Another 20 million tonnes of capacity will be added by the end of 2012 allowing BHP Billiton to increase its export capacity to 240 million tonnes.

Brazil will continue to be the second largest exporter of iron ore over the outlook period. In 2012, Brazil’s iron ore exports are forecast to increase by 6 per cent from the previous year to total 333 million tonnes. The increase is largely attributable to the increase in production at a number of mines in the South-eastern Systems and at Carajas where production ramped up from recent expansions. Brazil’s exports are projected to increase over the outlook period at an annual average rate of 8 per cent to reach 489 million tonnes in 2017 (see Figure 2). A significant proportion of these exports are expected to be sourced from expansions to Vale’s Brazilian operations. Several expansions are scheduled for completion over the next five years and are primarily concentrated in the Carajas and south-east iron ore systems. The largest of these projects is the 90 million tonne annual capacity Serra Sul project that is scheduled to be in operation towards the end of the outlook period. Other projects such as the expansion of ArcelorMittal’s Andrade iron ore mines and the potential commencement of the Vetria Mineração integrated project could further add to Brazil’s iron ore production and export capacity by end of 2017.

…while India’s iron ore exports projected to decline

India’s exports of iron ore are projected to decrease over the outlook period due to a government policy aimed at ensuring sufficient iron ore supply for domestic steel producers. Over the past 18 months a number of restrictions have been put in place that have reduced India’s iron ore exports. For example, in mid-2010, a ban on production in the Indian state of Karnataka was instituted by the Indian Government in an attempt to stop illegal mining, while restrictions on the movement of iron ore were placed in other states, namely Orissa and Goa. An export tax is being progressively increased and now stands at 30 per cent of the iron ore value.

Reflecting these restrictions and the high export tax, India’s iron ore exports in 2012 are forecast to decrease by 31 per cent, relative to 2011, to 43 million tonnes. Over the remainder of the outlook period, it is assumed that the Indian government will continue to implement policies that encourage the sale of iron ore to domestic steel producers. This is expected to result in India’s iron ore exports decreasing to 40 million tonnes by 2017.

Over the long term, new iron ore exporters may emerge as competitors to Australia’s and Brazil’s significant share of the traded iron ore market. One such region is West Africa.

In 2011, iron ore production in Western Africa was around 12 million tonnes, with the majority coming from Mauritania. However, there are significant quantities of high quality iron ore reserves in the region including Gabon, Cameroon and Guinea and a number of projects in these countries are being progressed. These include Rio Tinto’s Simandou project in Guinea, Sundance Resources’ Mbalam project in Cameroon, ArcelorMittal’s Yekepa project in Liberia and Faleme project in Senegal. Some of these projects have estimated resources that could eventually support annual production of up to 100 million tonnes. Almost all of the production would be exported.

In order for production and exports in these countries to grow, a number of challenges will need to be addressed. Many economies in West Africa lack suitable regulatory and fiscal frameworks which discourages mining investment because of sovereign risk issues.

At present there is limited export infrastructure in most West African economies to support large scale iron ore production and exports. Road, rail and port infrastructure will, therefore, need to be planned and built before mining can commence. Thus, while there is large potential for greatly increased supply from West Africa, there remain substantial hurdles to be overcome and these will limit African exports over the outlook period.

Growth in volumes to support Australian export earnings

In 2011–12, Australia’s export volumes are forecast to increase by 16 per cent, relative to 2010–11, to 473 million tonnes, underpinned by higher production at a number of mines. The value of Australia’s iron ore exports in 2011–12 is forecast to increase by 2 per cent to $59.7 billion, compared with 2010–11. This is largely attributable to an increase in export volumes being partially offset by the appreciation of the Australian dollar and a slight decline in prices from the previous corresponding period.

Over the medium term, growth in export volumes from capacity expansions at a number of mines will underpin an increase in export values. However, the positive effect of higher export volumes on export earnings will be partly offset by projected declines in contract prices over the remainder of the outlook period. Export volumes of iron ore are projected to increase at an average annual rate of 11 per cent, to reach 767 million tonnes (see Figure 3). Export earnings are projected to increase to $77 billion (in 2011–12 dollars), representing average growth of 4 per cent a year over the outlook period.

Figure 3: Australia’s iron ore exports

Please refer to page 80 of the Resources and Energy Quarterly – March quarter 2012 PDF version.

Metallurgical coal

World production and trade

In 2011, world metallurgical coal trade is estimated to have remained relatively unchanged, relative to 2011, at 271 million tonnes. The static growth in world trade was largely a result of disruptions to Australian exports as a consequence of substantial flooding in the major coal basins of Queensland. In 2012, world trade is forecast to grow by 10 per cent, relative to 2011, to reach 297 million tonnes.

Over the outlook period, world trade of metallurgical coal is projected to increase at an annual average rate of 5 per cent to reach 354 million tonnes in 2017 (see Table 3). The strongest growth in imports is expected to come from India, China and Brazil, while imports into Japan and the EU are projected to only increase moderately.

Australia’s metallurgical coal exports are projected to increase over the outlook period supported by the expansion of production and infrastructure capacity. New developments, in Mozambique and Mongolia, are also expected to contribute to growth in world metallurgical coal exports over the outlook period.

Over the outlook period, metallurgical coal imports into India, China and Brazil are projected to grow strongly, underpinned by strong growth in steel production. Between 2012 and 2017, China’s metallurgical coal imports are projected to increase by 7 per cent to reach 69 million tonnes by 2017. The growth in China’s imports reflects several factors. First, metallurgical coal reserves in China have higher production costs relative to imports and are of lower quality. These coal reserves are also large distances from steel mills in the southern coastal region of China. Second, new steel production capacity will be increasingly located in western regions due to Chinese Government urbanisation and industrialisation plans. While there are some metallurgical coal reserves in China’s west, the region is relatively close to the Mongolian border and the Chinese Government will likely encourage imports from Mongolia, which has substantial reserves.

India’s imports of metallurgical coal are forecast to increase at an annual average rate of 6 per cent over the outlook period to reach 46 million tonnes by 2017. Brazil’s imports are projected to increase at an average annual rate of 5 per cent between 2012 and 2017 to total 18 million tonnes by the end of the outlook period. The strong growth in imports in both Brazil and India, reflect expected strong growth in steel production and a reliance on imports in the absence of domestic metallurgical coal production.

World seaborne exports to grow steadily

In 2012, Canada’s exports of metallurgical coal are forecast to increase by 10 per cent, relative to 2011, to total 33 million tonnes. The increase is largely attributable to increased production at various mines including those owned by Teck. Over the remainder of the outlook period, Canada’s exports are forecast to increase at an annual average of 4 per cent to reach 38 million tonnes in 2017. This projected growth will come from incremental expansions planned by Teck, including expansions at the Fording River and Elkview operations and the scheduled completion of the Quintette project in 2013.

Over the outlook period, Mozambique and Mongolia are expected to emerge as important metallurgical coal exporters. In Mozambique, Vale has recently completed its 11 million tonne annual capacity (8.5 million tonne metallurgical coal) Moatize project and Rio Tinto’s Riversdale 2.4 million tonne annual capacity (1.6 million tonne metallurgical coal) Benga project is scheduled for completion in early 2012, with a potential for a further expansion to 3.3 million tonnes. Given that these are greenfield projects in a country that previously had very little export infrastructure there is expected to be a ramp up period of 2–3 years before full production rates can be achieved.

In 2011, Mongolia exported around 13 million tonnes of metallurgical coal, all of it to China. Coal is trucked to the Mongolian border where it is unloaded and then reloaded on to trucks or trains on the Chinese side of the border. Over the outlook period, Mongolia’s exports of metallurgical coal are projected to increase underpinned by significant reserves currently under development and robust demand from steel producers in China’s northern and western provinces. By 2017, Mongolia’s metallurgical coal exports are projected to reach 30 million tonnes. However, there are a number of challenges to the large scale development of metallurgical coal projects including insufficient infrastructure, particularly rail.

Australia’s metallurgical coal exports in 2011 decreased by 16 per cent, relative to 2010 to 133 million tonnes as the effects of heavy rain in January 2011 that reduced production for much of the year. Exports in 2012 are forecast to increase by 18 per cent to 157 million tonnes as production in Queensland recovers from flood-related disruptions in 2011. Over the outlook period, Australia’s exports of metallurgical coal are projected to increase at an average annual rate of 9 per cent to reach 219 million tonnes in 2017 (see Figure 4). The strong growth will be supported by new and expanded mining projects (see Table 5) and expansions to port and rail capacity on the Queensland coast, including developments at the ports at Abbot Point and Hay Point.

Australia’s metallurgical coal export volumes in 2011–12 are forecast to increase by 6 per cent to 148 million tonnes which is expected to result in an increase in export earnings by 1 per cent to $31 billion.