RAPID growth in the volume and value of LNG exports is set to ease the pain for the Australian economy over the next two years, as slowing demand for steel hurts the value of the nation’s iron ore and metallurgical coal exports.
The Department of Industry, Innovation and Science’s latest Resources and Energy Quarterly forecasts Australia will export 76.5 million tonnes of LNG in FY19, an average annual growth of 21.2% over the next two financial years.
In value terms, LNG exports will be worth $36 billion in FY19, according to the forecast – up from $22 billion in FY17.
“The value of Australia’s LNG exports increased 41% year-on-year in the September quarter [of 2017], with both the price and volume of Australia’s LNG exports higher than a year earlier,” the Department said in its latest report.
“Rising export values [through to FY19] will be propelled by higher export volumes and, to a lesser extent, higher prices.”
Higher export volumes will be driven by increased production at the Gorgon gas project on Barrow Island off Western Australia, the report states, along with the completion of the country’s three remaining LNG projects under construction – Wheatstone, Ichthys, and Prelude.
“These three projects will add around 21 million tonnes to Australia’s LNG export capacity, bringing total nameplate capacity to around 88 million tonnes.”
In the 2016 calendar year, Australia sat as the world’s second-largest exporter of LNG, at 45.0 million tonnes, behind Qatar, at 73.8 million tonnes.
Japan is the largest importer of LNG, at 85.6 million tonnes in 2016, followed by South Korea and China, at 32.5 and 22.8 million tonnes, respectively.
Iron ore, coal values to drop
Australia’s 27.7% average annual increase in LNG export value forecast through to FY19 will help make up the forecast drop in export value for two of Australia’s most important commodities: iron ore, and metallurgical coal.
Spot prices for both steelmaking commodities will drop over the next two financial years, as increasing global supply of both commodities outpaces steel production, according to the Department’s report.
This forecast follows a solid year for steel production growth in 2017, which saw iron ore and coal exporters enjoy a healthy bump to prices.
“Robust growth in world steel production and consumption in 2017 was supported by stimulatory policies in China (aimed at maintaining economic growth) and growing momentum in economic activity in the rest of the world,” the report explains.
“The pace of production and consumption growth is forecast to slow in 2018 and 2019, as the gradual effects of economic reforms and increasingly stringent environmental regulations in China outweigh an ongoing pick-up in growth elsewhere in the world.”
As growth in global steel production slows, the iron ore market is set to be flooded with more supply, driving down prices.
“The iron ore price is forecast to decline to US$49 a tonne (FoB Australia) in 2019, due to growing low-cost supply from Australia and Brazil and moderating demand from China,” the report states. “The outlook for the iron ore price is sensitive to the pace and magnitude of the decline in China’s steel production, which in turn, largely depends on government policy.”
Australia exported 53% of the world’s traded iron ore in 2016, followed by Brazil at 24%, and South Africa at 4%. China imported 67% of the world’s traded iron ore, followed by the European Union at 10%, Japan at 8%, and South Korea at 5%.
Australia’s metallurgical coal exports face a similar story to that of iron ore: exports from the United States have surged in recent years, and are set to stay stable to 2019, while ramp-ups in Canada, Mongolia, Russia and Mozambique will add more met-coal to the global market.
This will create a 13.9% compound average decline through to FY19, according to the Department’s forecast, in the value of metallurgical coal exports, despite a 4.2% compound average growth in their volume.
* Oliver Probert is the editor of Rail Express