Resources and Enegy Quarterly - March Quarter 2012 · Web viewPlease refer to page 7 of the Resources and Energy Quarterly – March quarter 2012 PDF version. The outlook for the

Resourcesand Energy

QuarterlyMarch quarter

2012

BREE 2012, Resources and Energy Quarterly, March Quarter 2012, BREE, Canberra March 2012.

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ISSN 1839-499X (Print)

ISSN 1839-5007 (Online)

Vol. 1, no. 3

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

Postal address:

Bureau of Resources and Energy EconomicsGPO Box 1564Canberra ACT 2601 AustraliaPhone: +61 2 6276 1000

Email: [email protected]

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mailto:[email protected]

Foreword

Resources and Energy Quarterly is an important publication of the Bureau of Resources and Energy Economics. This issue provides an overview of the global macroeconomic situation; the most up-to-date global production, exports and values of major resources energy commodities and forecasts for 2011–12 until 2016–17; reviews of key topics and issues of 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 production and exports over several years.

In the review section of Resources and Energy Quarterly there is a comparison of Australian, OECD and global energy markets; a SWOT analysis of Australia’s LNG industry; and a short history of uranium.

BREE’s forecast for the value of Australian exports of resources and energy for 2011–12 is about $200 billion or about a little less than a 10 per cent increase over 2010–11. This export growth is despite an increase in the value of the Australian dollar in the second half of 2011 and forecasted reduction in global economic growth in 2012.

Over the short term overall metal prices are projected to decline by 6 per cent in 2012 relative to the average price in 2011. The key long-term projection in this issue is that future growth in Australian export earnings from minerals and energy will be generated by higher volumes and, with a few exceptions, will be not be because of rising commodity prices.

Quentin Grafton

Executive Director/Chief Economist

Bureau of Resources and Energy Economics

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ContentsMarch quarter 2012..................................................................................................................1

Foreword..................................................................................................................................3

Contents...................................................................................................................................4

Acronyms and abbreviations....................................................................................................5

Macroeconomic outlook and energy and minerals overview...................................................6

Energy outlook........................................................................................................................19

Oil.......................................................................................................................................19

Gas......................................................................................................................................32

Thermal coal.......................................................................................................................42

Uranium..............................................................................................................................53

Resources outlook..................................................................................................................61

Steel and steel-making raw materials.................................................................................61

Gold....................................................................................................................................75

Aluminium..........................................................................................................................82

Copper................................................................................................................................90

Nickel..................................................................................................................................97

Zinc...................................................................................................................................106

Reviews.................................................................................................................................114

A comparison of Australian, OECD and global energy markets............................................115

Australia's LNG industry – a SWOT analysis..........................................................................121

A short history of uranium....................................................................................................126

Statistical tables....................................................................................................................133

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Acronyms and abbreviationsABARES 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

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, Pam Pham, Quentin Grafton and Roger Rose

The global economy: stalled recovery in Europe and elevated risks

The world economy has entered a challenging period with increased vulnerabilities and a moderation of global growth in 2012 relative to 2010 and 2011.The updated World Economic Outlook by the International Monetary Fund (IMF) in February 2012 projects global activity decelerating in the year ahead because of the effects of the euro zone debt crisis which have spread beyond Europe. Uncertainties associated with the sovereign debt crisis in Europe have also generated large fluctuations in financial markets and this volatility has had a negative impact on consumer and business confidence.

Global economic growth in 2012 is assumed to be around 3.3 per cent (see Figure 1), which is 0.75 percentage points down from the forecast in the September 2011 World Economic Outlook (WEO) by the IMF. The expected slower growth rate is attributed largely to intensifying strains in the euro zone and economic fragilities in some other large economies. Within most of Western Europe short- to medium-term economic growth prospects have diminished. Despite a strengthening of economic activity in the US, global growth and world trade have slowed (see Table 1).

Europe appears to have entered a mild recession in 2012 caused by the rise in sovereign yields in 2010 and 2011, the effects of bank deleveraging on the real economy, and the impact of on-going fiscal consolidation. The main reason for the diminished outlook in Europe is the escalating euro zone crisis. It is interacting with financial fragilities elsewhere, has sharply reduced capital flows to emerging economies, and led to substantial changes in the relative values of key currencies.

Figure 1: World economic growth

Please refer to page 7 of the Resources and Energy Quarterly – March quarter 2012 PDF version.

The outlook for the large developed economies in 2012 is assumed to be weaker than in 2010 or 2011. Growth in Western Europe is expected to falter in 2012. Most advanced economies, however, are expected to avoid falling back into a recession and overall economic growth in the advanced economies is projected to average 1.5 per cent during 2012 and 2013.

Emerging economies, particularly those in Asia, contribute to an already important and increasing share of world economic growth. Over the outlook period the prospects for emerging economies are much better than those for advanced economies, but are becoming less certain, especially for those countries that are highly reliant on export-led growth. Annual economic growth in emerging and developing economies is expected to average 5.75 per cent—a significant slowdown

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from the 6.75 per cent growth experienced from 2010 to 2011, and about 0.5 percentage points lower than forecast in September 2011 by the IMF. These revised growth figures reflect a less optimistic external environment in terms of trade and a slowdown in domestic demand in key emerging economies.

Most of Asia and Latin America experienced robust economic growth in 2011. Growth is expected to moderate in 2012, but to regain strength in 2013 and beyond. Unlike some advanced economies for some of these emerging economies their immediate concern is rising inflation rather than lagging growth.

In Asia, recent data are broadly consistent with the modest slowdown that some authorities in the region have been trying to achieve in order to contain inflationary pressures. India and China, in particular, are trying to reduce the rates of price increases and their actions are expected to moderate their previously very high rates of economic growth.

Table 1: Key macroeconomic assumptions for resources and energy2010 2011 2012

a2013 a

2014 a

2015 a

2016 a

2017 a

Economic growth b c OECD % 3.0 1.4 1.1 1.8 2.0 2.0 2.0 2.0United States % 3.0 1.8 1.8 2.2 2.7 3.0 3.0 3.0Japan % 4.0 –0.9 1.7 1.6 1.6 1.2 1.1 1.1Western Europe % 1.8 1.5 –0.3 0.9 1.2 1.1 1.2 1.2Germany % 3.7 3.1 0.3 1.5 1.4 1.2 1.2 1.2France % 1.5 1.6 0.2 1.0 1.1 1.1 1.1 1.1United Kingdom % 1.4 0.9 0.6 2.0 2.2 2.2 2.3 2.3Italy % 1.3 0.4 –2.2 –1 0.5 0.7 0.8 0.8Republic of Korea % 6.2 3.9 4.4 4.3 3.4 3.4 3.4 3.4New Zealand % 1.7 2.0 3.8 3.2 2.6 2.3 2.2 2.2

Emerging countries % 7.8 6.5 6.0 6.4 6.4 6.4 6.4 6.4Non-OECD Asia % 9.6 8.0 7.5 7.9 7.9 7.9 7.9 7.9South East Asia d % 6.9 5.3 5.6 5.8 6.0 6.0 6.0 6.0China e % 10.3 9.2 8.2 8.8 8.8 8.8 8.8 8.8Chinese Taipei % 10.9 5.4 5.1 5.0 4.2 4.2 4.2 4.2Singapore % 14.5 4.3 3.4 4.2 4.2 4.1 4.0 4.0India % 9.0 7.4 7.0 7.3 7.3 7.3 7.3 7.3Latin America % 6.1 4.6 3.6 3.9 3.8 3.7 3.7 3.7Middle East % 3.8 3.1 3.2 3.6 4.2 4.3 4.4 4.4Russian Federation % 4.0 4.1 3.3 3.5 3.5 3.4 3.3 3.3Ukraine % 4.2 4.2 4.3 4.0 3.8 3.6 3.6 3.6Eastern Europe % 4.2 5.1 1.1 2.4 2.1 2.1 2.2 2.2

World c % 5.0 3.8 3.3 3.9 4.1 4.1 4.1 4.1

Industrial production bOECD % 7.9 2.8 3.0 4.2 4.6 4.6 4.5 4.5Japan % 16.0 –3.5 7.1 6.7 6.5 4.8 4.4 4.4China % 15.7 9.9 8.8 9.5 9.4 9.5 9.5 9.5

Inflation rate b

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2010 2011 2012 a

2013 a

2014 a

2015 a

2016 a

2017 a

United States % 1.6 3.4 2.3 2.3 2.3 2.3 2.3 2.3

Interest ratesUS prime rate g % pa 3.3 3.3 3.3 3.3 3.4 3.5 3.5 3.5

a BREE assumption. b Change from previous period. c Weighted using 2011 purchasing power parity (PPP) valuation of country gross domestic product by the IMF. d Indonesia, Malaysia, the Philippines, Thailand and Vietnam. e Excludes Hong Kong. g Commercial bank lending rates to prime borrowers in the US.Sources: BREE; ABS; IMF; OECD; RBA.

Economic prospects in Australia’s major mining export markets

Non-OECD economies

The Chinese economy continues to record strong growth, although this is projected to moderate in 2012. In part, this expected easing in economic growth is due to domestic economic policies to combat inflation, including the continuing unwinding of the 2008–09 fiscal stimulus, tighter monetary policy and measures to contain price increases in its property market. Additionally, spillovers from problems in the broader global economy and some high internal risks facing the Chinese economy could threaten and slow economic growth. Internally, socioeconomic factors, such as the structural effect of the so-called ‘middle income trap’, if not well managed, and rising inequality could slow economic growth.

Despite some moderation in economic growth, domestic demand remains strong. Retail sales continue to expand and passenger vehicle sales are just below their late 2010 peak level. Although there has been relatively weaker export demand, manufacturing investment continues to grow. Industrial production growth remains robust, but slightly below 2011 levels, and both power generation and automobile production are growing strongly. As a result, over the outlook period China is expected to continue its major role as a growth engine for the world economy.

In 2012, gross domestic product (GDP) growth for the Chinese economy is assumed to be lower than in 2011, although remaining at a robust level of 8.2 per cent. This is 0.8 per cent below that assumed by BREE in December 2011. An annual rate of economic growth of 8.8 per cent (based on purchasing power parity terms (PPP) valuation of GDP) is assumed over the medium term (see Figure 2).

Over the past decade rapid economic growth, growing urbanisation, and structural change within manufacturing have combined to make China the world’s largest energy user, outstripping the US in 2010 although, on a per capita basis, the US still consumes much more energy than China.

For Australia, China is the most important market for mining. Over the medium term, China is expected to remain the most important mining export market for Australia, given a strong trend of continued growth in industrialisation and urbanisation, both of which are resource-intensive.

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The rapid expansion of industrial production in China is expected to support growth in energy and minerals consumption over the medium term. The expansion of resource intensive industries such as electricity generation and steel, pig iron and cement production is expected to remain strong. Over the longer term China’s growing technological prowess could drive rapid change in its industrial structure. These changes should create new areas of dynamic comparative advantage. For instance, China’s construction industry is becoming a global leader in international construction projects.

In 1978, less than a fifth of China’s population resided in cities; by 2009, urban residents made up close to half the population; and by 2030, the share is expected to swell to near two-thirds. Most urban growth in the future is expected to result from the expansion of existing cities through migration from rural areas. China’s strong growth of per capita income and an expanding middle class over the medium term outlook will also increase demand for resource-intensive consumer durables, such as motor vehicles and electronics.

Figure 2: Economic growth in Australia’s major resource and energy export markets


Box 1: Fiscal consolidation: Implications for economic growth and demand

Global economic growth is vulnerable to spillovers associated with the European sovereign debt crisis and fiscal consolidation in Western Europe. Too rapid fiscal consolidation during 2012 could exacerbate downside risks. Ideally, fiscal consolidation should occur at a pace that supports adequate growth and employment. From Australia’s perspective too rapid fiscal consolidation in major export markets could have a short-term negative effect on both the price and volume of key resource commodities.

The global financial crisis resulted in a sharp deterioration in the fiscal health of many advanced economies. For example, Spain moved from a budget surplus of 2 per cent of its GDP in 2007 to a deficit of 11 per cent in 2009. For the US and the UK, the budget deficit increased by 10 and 8 percentage points of GDP, respectively. Government fiscal stimulus packages in response to sharp falls in consumer demand during the global financial crisis were primary causes of those increasing deficits. While the stimulus spending has decreased since 2009–10, budget deficits persist and in many countries debt-to-GDP ratios have continued to rise.

In the medium term, lower budget deficits and fiscal consolidation should support economic growth by reducing real interest rates, lowering tax burdens and encouraging increased private sector investment. In the short term, however, fiscal consolidation will likely slow economic activity. This is especially the case for some countries in southern Europe that are already in recession and have an exchange rate determined by economic conditions for the euro zone as a whole, rather than

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by country-specific conditions. Should there be widespread and rapid fiscal consolidation, this could have a short-run moderating effect on prices of resource commodities used in industrial production.

The IMF assumes that, for the global economy as a whole, fiscal consolidation equivalent to 3 percentage points of GDP will occur in 2013. Over the next two years fiscal consolidation is projected at around 4.6 per cent of GDP for advanced economies. In the euro zone, the IMF projects that fiscal consolidation will be around 3 per cent of GDP in 2012 and 2013. Fiscal consolidation in the US is estimated to represent about 1 per cent of GDP in 2011, and projected to be between 2 to 4 per cent of GDP over the next two years.

Japan is projected to be the only large advanced economy to implement a fiscal expansion in 2012 reflecting, in part, reconstruction costs related to the natural disaster of March 2011. Its fiscal deficit is estimated to have increased by around 0.8 per cent in 2011 and projected to remain at that level in 2012, but to fall by 0.5 per cent of GDP in 2013. Total reconstruction costs are budgeted at about 4 per cent of GDP over 2011 to 2013 and are expected to be financed, on the first instance, via bond sales.

In China, the budget deficit was around 2.5 per cent of GDP in 2010, and 3.1 per cent in 2009. In 2012 an improvement of China’s budget condition is expected with its deficit expected to be around US$126 billion, down from U$142 billion in 2011.

Sources: IMF; RBA; NBS China.

Economic growth in India has moderated due to policies intended to combat rising inflationary pressures. Economic growth is projected to be 7 per cent in 2012, 0.5 percentage points lower than assumed by BREE in December 2011. The slowing in growth follows a significant tightening in monetary policy. Growth in industrial production is projected to remain subdued over the medium term at around 6 per cent a year below its early 2011 peak. In addition to the effect of tighter monetary policy, industrial production has also been affected by problems at a number of coal-mines that have disrupted the fuel supply for thermal coal power stations. Furthermore, the value of merchandise exports fell in the December quarter, reflecting weaker external demand and lower commodity prices, particularly for iron ore. Despite some moderation, inflation in India still remains relatively high as the wholesale price index rose by 7.5 per cent over the year to December 2011.

Near-term growth in ASEAN countries (including Indonesia, Malaysia, Philippines, Thailand, and Vietnam) is assumed to be around 5.6 per cent in 2012 due to robust investment. This investment should offset a possible slowdown in export momentum.

Despite the weak global outlook for 2012, the Republic of Korea’s economy is expected to grow at more than 4 per cent in 2012 and 2013, but to slow from 2014. In Asia as a whole, growth is projected to moderate in 2012. Nevertheless, even with

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some moderation, growth is expected to be robust at 7.5 per cent, on average, during 2012 and 2013.

OECD economies

Economic growth in OECD economies is assumed to be 1.1 per cent in 2012. The annual growth rate in Japan is assumed to be 1.7 per cent, 0.8 percentage points lower than assumed in December 2011 by BREE. The pace of growth in the 17 countries in the euro zone slowed in 2011, and is expected to deteriorate further in 2012. In Greece, Ireland, Italy, Portugal, and Spain, fiscal tightening, banking system concerns, low consumer confidence and high unemployment are all having a negative impact on domestic demand. An expected slow-down in growth in the core northern euro zone economies, such as Germany, is likely to make economic conditions in the southern economies more difficult in 2012.

The German economy remains the most robust in Western Europe with strong export-led growth of 3.1 per cent in 2011. However, German industrial production has fallen by almost 5 per cent from its peak in July 2011 and growth is expected to be down to 0.3 per cent in 2012. Forward-looking indicators of equipment investment and exports, the two strongest sectors in the German recovery, have moderated. By contrast, construction activity in Germany has remained more or less unchanged in recent months. Over the medium term economic growth is expected to recover to an annual rate of 1.5 per cent by 2013, and rates of around 1.2 per cent to 1.4 per cent over the following two years.

The US economy has been improving in recent months. Its unemployment rate is declining and there are tentative signs of improvement in housing construction activity. The economy is estimated to have grown at a rate of 1.8 per cent in 2011 and is assumed to continue growing at that rate in 2012. Economic growth is expected to be supported by increases in consumption and business investment, with forward-looking indicators of economic activity improving. Assumed very low nominal interest rates over the next two years are expected to provide stimulus to investment. In 2012, the negative spillovers from the euro zone crisis are expected to be offset by stronger underlying domestic demand. Nonetheless, economic activity may slow from the pace reached during the second half of 2011, as higher risk aversion tightens financial conditions and fiscal policy becomes less expansionary.

Commodity prices

Commodity prices which increased substantially in 2010 have moderated since mid-2011 as a result of the slowing growth in the global economy in the second half of 2011. Commodity prices were also lower in the December quarter 2011 compared with the previous quarter. Prices for some base metals and bulk commodities fell sharply in the second half of 2011 in response to weaker global demand (see Figure 3). An exception is thermal coal, with its price more or less unchanged over the last quarter of 2011 (see Figure 4). The resilience of the thermal coal spot price, relative to other bulk commodities, reflects different demand conditions. In particular, the shutdown of nuclear power generation capacity in several countries (especially

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Japan), and below average hydro electricity generation in China, have provided strong underlying support for thermal coal demand.

Figure 3: Quarterly index of metal prices


Figure 4: Quarterly index of bulk commodity prices


In 2012, commodity prices are expected to continue to ease given the current lower than expected growth in the global economy. Overall, metal prices are projected to decline 6 per cent in 2012 relative to the average price in 2011. The price of crude oil is expected to average $98 per barrel in 2012, down 6 per cent from the 2011 average; while iron ore prices are expected to ease by about 8 per cent. Commodity prices are expected to remain relatively stable over the remainder of the outlook period.

Demand for resources and energy commodities

Uncertainties about future growth prospects associated with the sovereign debt crisis in Europe generated very large fluctuations in financial markets in the second half of 2011 and early 2012. This volatility is expected to depress demand growth for commodities in the short-term as ongoing and sharp fluctuations in financial markets moderate consumer and business confidence.

In Japan, industrial production and exports were severely affected following the March 2011 earthquake and tsunami, but are recovering at a greater-than-expected rate. Demand in Japan is expected to grow in response to the necessary rebuilding of infrastructure. Domestic and external demand in several central Asian countries that have significant financial and trade linkages to the euro zone have also weakened as a result of the ongoing euro crisis. In South Asia, domestic demand is expected to continue to slow in 2012.

Consumption demand in large export-oriented European Union (EU) economies, such as Germany, will depend on efforts to remediate public debt and liquidity concerns in the region as a whole. Growth has slowed due to a combination of weakening domestic and external demand. Several Central European countries are particularly vulnerable to the deepening crisis in the euro zone due to close trade linkages and high levels of maturing debt.

On a positive side, faster convergence to trend economic growth in the US is forecast to support resources and energy commodity demand in that economy. However, the size of this effect on commodity prices will depend on the scale of the recovery in the US housing and labour markets.

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In 2012, demand for resources and energy commodities is expected to ease in response to weaker growth in many countries. China is expected to continue its major role in maintaining both the supply and demand side of the global economy. However, a dip in its growth rate in 2012 is expected to moderate demand for some bulk commodities in 2012.

Supply of resources and energy commodities

Over the outlook period, the production of most energy and mineral commodities is projected to grow. In 2012, world refined nickel production is projected to grow by 5.6 per cent, relative to 2011, to total of 1.7 million tonnes. This growth is expected to come from increased production at new operations and an increasing use of existing spare capacity. It is forecast that, relative to 2011, there will be a production growth in 2012 for aluminium and alumina (both up 2 per cent), oil (up to 1.2 per cent), steel (up 5.4), uranium (2.8 per cent) and zinc (up 3.2 per cent). Supported by forecast high growth in steel production, primarily in China, world trade of iron ore in 2012 is forecast to increase by 3.6 per cent and metallurgical coal by 3.5 per cent, relative to 2011. By contrast, concerns about geopolitical oil supply risks have risen again. The impact of a sustained oil supply disruption in the Middle East would be substantial. Should this happen it would result in sharply higher petroleum prices as there are limited inventories and spare capacity buffers.

Australia’s economic prospects

Real GDP in Australia (based on a PPP valuation of GDP) is assumed to grow at annual rate of 3.8 per cent in 2011–12, but to moderate to around 3 per cent over the remainder of the outlook period (see Table 2). According to the ABS, economic growth in the last quarter of 2011 was half of what was expected, and lead to the slowest annual growth since 2008. However, Australia remains among the fastest growing economies in the world.

Recent economic data suggest that the mining sector will continue to perform strongly in terms of both volumes of exports and growth in capital investments. Overall, Australian domestic demand continues to grow at a robust pace, although the high level of the exchange rate, and changes in household spending and borrowing behaviour continue to have a negative affect on some industries. As in many other countries, volatility in global financial markets has resulted in noticeable declines in measures of consumer and business confidence in the latter half of 2011.

Over the remainder of the outlook period (2012–13 to 2016–17), growth in the Australian economy is expected to be supported by mining-related activities. High levels of mining investment are expected to continue. Significant expansions to iron ore and coal production capacity are also underway, and will contribute to solid growth in resource export volumes over the foreseeable future.

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Table 2: Australia’s key macroeconomic assumptions for resources and energy

2009–10

201–110

2011–12 a

2012–13 a

2013–14 a

2014–15 a

2015–16 a

2016–17 a

Economic growth b c % 2.3 1.8 3.8 3.0 3.0 3.0 3.0 2.9

Inflation rate b % 2.3 3.1 1.8 2.8 2.8 2.8 2.8 2.8Interest rates d % pa 6.0 6.6 7.2 6.7 6.7 6.7 6.7 6.7Nominal exchange rates eUS$/A$ US$ 0.88 0.99 1.04 1.05 1.03 1.03 1.05 1.06Trade weighted index for A$ g index 69 74 76 76 75 75 76 77

a BREE assumption. b Change from previous period. c Weighted using 2011 purchasing power parity (PPP) valuation of country gross domestic product by IMF. d Large business weighted average variable rate on credit outstanding. e Average of daily rates. g Base: May 1970 = 100.Sources: BREE; ABS; RBA.

The Australian dollar traded in a wide range during 2011. In December, the Australian dollar traded at US102c, TWI 76. This compares with US98c and TWI 72 in September 2011, and US106c and TWI 75 in early June 2011. In mid-March 2012, the Australian dollar traded around of US105c while the trade-weighted index was around 78. The recent fall of the Australian dollar from US108c and TWI79 in late February was a result of speculation that lower economic growth in the December quarter 2011 would increase the likelihood of an interest rate cut by the Reserve Bank.

There are several important drivers of the Australian exchange rate over the medium term. In the next three years factors that may cause the Australian dollar to weaken are: the effect of the expected euro zone recession in 2012; a possible reduction in demand in Europe for China’s exports; a stall in the US economic recovery; and any decline in domestic interest rates.

In the last two years of the outlook period (2016 and 2017), it is assumed that the Australian dollar will slightly increase in value due to: expected stronger economic growth in Australia; recovery in the EU economy; a rebound in demand in Europe for China’s exports; and relatively low ongoing interest rates in the US that should dampen demand for US dollars. The demand in Asia for Australia’s exports, and market expectations about resources and energy commodity prices, are also factors that will influence the value of the Australian dollar over the outlook period.

The Australian mining sector

In 2010–11, the mining sector contributed approximately 7 per cent of Australia’s total GDP. The gross value added produced from mining activities was about $100.7 billion (in 2011–12 dollars), of which $9.5 billion was contributed by exploration and mining support services (see Figure 5).

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Figure 5: Australian mining industry gross value added, chain volume measures


Resources and energy commodity exports account for a large proportion of Australia’s commodity exports. In 2010–11, the value of energy and minerals commodity exports was about $179.2 billion, some 85 per cent of Australia’s total value of commodity exports.

China is the main export market for Australia’s resources and energy exports, accounting for 26 per cent of Australian total export value of resources and energy commodities in 2010–11, followed by Japan (19 per cent), the Republic of Korea (9 per cent) and the US (4 per cent).

Over the past decade, there has been a significant increase in the value of investment in the Australian mining sector, supported by high commodity prices and strong demand from Asia. In 2010–11, investment in private new capital expenditure in the mining sector was $47.2 billion. This compared with inflation-adjusted figures (in 2011–12 dollars) of $37.5 billion in 2009–10 and $7.9 billion a decade ago. The share of the mining sector as a proportion of new capital expenditure of Australia’s total industries has also increased significantly, rising from 12 per cent in 2000–01 to 39 per cent in 2010–11 (see Figure 6). Much of this growth is underpinned by liquefied natural gas (LNG), coal and iron ore projects.

Figure 6: Investment in private new capital expenditure


As a capital-intensive industry, the contribution of the mining industry to total employment is low, and accounted for about 2 per cent of total employment over the past three years. In 2010–11, the sector employed about 205000 people. By sub-industry, the metal ore industry employed the largest number of people (about 69000 people), followed by the coal and oil and gas extraction industry (see Figure 7).

Figure 7: Employment in the Australian mining industry


Australian resources and energy commodities production and exports

In 2010–11, the overall index of Australian mine production increased by 5 per cent compared with 2009–10. This includes a 13 per cent increase in metals and other

16

minerals production that was offset by a 3 per cent decrease in the production of energy commodities, primarily coal due to flooding in Queensland (see Figure 8).

Total Australian mine production is forecast to increase by 6 per cent in 2011–12, relative to 2010–11, primarily due to a 7 per cent increase in the output of energy commodities, particularly thermal and metallurgical coal. Another contributing factor to this growth will be a forecast 6 per cent increase in the production of metals and other minerals, underpinned by rising nickel and zinc production.

Figure 8: Australian mine production


Export earnings from energy and minerals commodity exports increased by 25 per cent in real terms (in 2011–12 dollars) between 2009–10 and 2010–11, reaching $185 billion in 2010–11 (see Figure 9). Of this total, export earnings from minerals commodities contributed $113 billion, accounting for about 61 per cent of the total. Export earnings from energy commodities accounted for a smaller share, 39 per cent, and contributed approximately $72 billion in real terms to the total value of Australian energy and minerals exports.

Figure 9: Australian energy and minerals export earnings


In 2011–12, the total export earnings for energy and mineral commodities are forecast to increase by 8 per cent to $199 billion supported by increases in the export values for both energy and mineral commodities. Energy commodity export earnings are forecast to grow by 7 per cent to $77 billion (in 2011–12 dollars) as a result of strong increases in export earnings from thermal coal (up 28 per cent to $17.8 billion), LNG (up 13 per cent to $12 billon), oil (up 7 per cent to $12.6 billion), and metallurgical coal (up 4 per cent to $31 billion).

Mineral commodity export earnings are forecast to increase by 8 per cent to $122 million as a result of increases in the export values of gold (up 33 per cent to $17.3 billion), alumina (up 14 per cent to $6 billion), copper (up 7 per cent to $9 billion), and iron ore (up 2 per cent to $59.7 billion). Partially offsetting the increased export earnings for mineral commodities will be lower forecast export earnings for aluminium (down 9 per cent to $3.8 billion), and zinc (down 8 per cent to $2.2 billion).

Over the medium term, the outlook for energy and minerals commodity exports remains robust (see Table 3 and Table 4). Investment in LNG production facilities will drive a surge in LNG exports over the outlook period and the commissioning of the Pluto LNG project is expected to boost exports in 2012. Based on mining, rail and port infrastructure expansions currently under way or in planning, significant growth

17

in coal export capacity is expected over the next three years. The outlook for major energy and minerals commodities in detail is outlined in the following Resources Outlook and Energy Outlook sections.

Table 3: Australia’s resources and energy commodity exports, by selected commodities

Volume Value b

2010-11 2016-17 z

average annual growth % 2010-11 2016-17 z

average annual growth %

Oil ML 19638 13945 –5.5 $m 12166 7961 –6.8

LNG Mt 20 63 21.1 $m 10786 25819 15.7

Thermal coal Mt 143 268 11.0 $m 14423 18793 4.5

Uranium t 6950 13700 12.0 $m 630 1687 17.8

Iron ore Mt 407 767 11.1 $m 60340 76777 4.1Metallurgical coal Mt 140 218 7.7 $m 30790 30387 –0.2

Gold t 301 396 4.7 $m 13451 13994 0.7

Alumina kt 16227 20771 4.2 $m 5392 7801 6.3

Aluminium kt 1686 1619 –0.7 $m 4318 3578 –3.1

Copper kt 850 1201 5.9 $m 8703 8983 0.5

Nickel kt 210 300 6.1 $m 4233 4429 0.8

Zinc kt 1493 1958 4.6 $m 2452 2926 3.0

b In 2011–12 Australian dollar, z BREE projections.Sources: BREE; ABS.

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Table 4: Medium term outlook for Australia’s resources and energy commodity sector

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

Commodity exports Exchange rate US$/A$ 0.88 0.99 1.04 1.05 1.03 1.03 1.05 1.06

Value of exportsResources and energy A$m 139468 179232 198500 207450 222679 233877 247292 255268

– real b A$m 148599 185229 198564 201771 210623 215127 221208 222059

Energy A$m 57478 69670 77099 76048 82642 84589 93062 100479– real b A$m 61241 72001 77123 73966 78167 77807 83246 87407

Metals and other minerals A$m 81990 109562 121401 131402 140037 149288 154229 154789

– real b A$m 87358 113228 121440 127805 132456 137320 137961 134652

Resources and energy sectorVolume of mine production c index 90.2 94.1 100.0 105.6 114.1 118.4 123.0 126.6

– energy index 96.7 93.2 100.0 104.8 113.3 117.4 124.9 132.3– metals and other minerals index 84.3 94.9 100.0 106.2 114.8 119.2 122.1 123.5

Gross value of mine production A$m 133890 172063 190560 199152 213772 224522 237400 245057

– real b A$m 142655 177820 190621 193700 202198 206522 212359 213177

b In 2011–12 Australian dollars. c Base 2011–12=100. f BREE forecast. z BREE projection.Sources: BREE; ABARES; ABS.

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Energy outlook

Oil

Nina Hitchins

The West Texas Intermediate (WTI) oil price is forecast to increase to an average of US$113 a barrel in 2013, assuming crude oil stocks in Cushing return to historic levels. The Brent oil price is forecast to increase to an average of US$119 a barrel in 2013, supported by strong demand from emerging economies. Over the medium term, further increases in oil prices are projected to be limited by higher OPEC spare production capacity and the exploitation of unconventional oil resources. In 2017, the WTI oil price and the Brent oil price are projected to average US$105 and US$104 (in 2012 dollars), respectively.

World oil consumption is forecast to increase in 2012 and 2013 by 0.9 and 1.4 per cent, respectively. Stronger consumption growth in 2013 reflects assumed improvements in world economic activity. For the remainder of the outlook period, world oil consumption is projected to increase at an average annual rate of 1.1 per cent, as the intensity of oil use within non-OECD economies falls.

In 2012, non-OPEC oil production is forecast to account for the majority of the increase in world oil production. Over the medium term, however, OPEC oil production is projected to constitute an increasing proportion of the world supply.

The value of Australian crude oil and condensate exports is forecast to total $12.6 billion in 2011–12. Over the following four years, export earnings are projected to decline, reflecting lower export volumes associated with falling production from maturing fields. However, in 2016–17, the value of Australia’s crude oil and condensate exports is projected to increase to $8 billion (in 2011–12 dollars) supported by condensate production associated with the Prelude and Ichthys projects.

Higher oil prices over the medium term

The WTI crude oil price averaged US$95 a barrel in 2011, an increase of 20 per cent from 2010. As explained in Box 1: The Brent-WTI price differential (REQ December 2011, pp. 20–21) increases in the WTI price were constrained by higher stocks of crude oil in Cushing. Meanwhile, the Brent price averaged US$110 in 2011, an increase of 39 per cent from 2010. Higher prices reflected supply disruptions in both OPEC and non-OPEC regions and strong consumption growth in non-OECD economies. Price increases were amplified by low OPEC spare production capacity and lower OECD stocks.

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Figure 1: Weekly WTI oil price


OECD oil stocks declined during 2011, and are estimated to have averaged 2 per cent lower than stocks recorded in 2010. Lower stocks reflected the IEA’s decision in June 2011 that member countries would collectively release 60 million barrels over 30 days to replace lost Libyan production. OPEC spare production capacity is estimated to have fallen to an average of 4.4 million barrels a day in 2011, from an average of 6.1 million barrels a day in 2010. The reduction in OPEC spare capacity reflected production shut-ins in Libya during the civil war, which prompted other OPEC members to use a greater proportion of their capacity.

In 2012, OPEC spare production capacity is forecast to increase as Libyan oil production approaches pre-war output. This excess capacity and growth in non-OPEC oil production are forecast to limit increases in the Brent oil price over the short term. The Brent price is forecast to average US$119 in 2013, supported stronger growth in world oil consumption. The WTI price is forecast to converge to the Brent price, assuming pipeline constraints in the US are resolved and stocks in Cushing decrease (see Figure 2).

There are two significant risks to the short term outlook for oil prices. The first risk relates to potential escalations of tensions in the Middle East that could cause production disruptions, and put upward pressure on oil prices. The second risk is weaker than assumed world economic growth over the next 12 to 18 months, which may put downward pressure on oil prices.

Figure 2: WTI and Brent oil prices


For the remainder of the outlook period (2013 to 2017), OPEC spare capacity is projected to average 5.4 million barrels a day, supported by growing capacity in Iraq, the United Arab Emirates (UAE) and Angola. An increase in OPEC spare capacity is expected to limit the rise in oil prices over the medium term, as unexpected increases in demand will be met by increased utilisation of capacity. Between 2014 and 2017, the Brent and WTI oil prices are projected to average US$108 (in 2012 dollars), in line with moderating world oil consumption growth, and the increased viability of exploiting unconventional resources. By the end of the outlook period, the traditional WTI-Brent price relationship, typically characterised by US$1-3 dollar a premium of WTI above Brent, is projected to reappear.

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Exploration and development activity at a 27 year high

Movements in oil prices over the medium term will depend on discoveries that expand economic demonstrated reserves, and ultimately world production. Investment in oil exploration, as measured by the Baker Hughes worldwide drilling rig count, reached 3751 in January 2012, the highest count recorded since 1985.

Figure 3: Worldwide drilling count and the WTI oil price


High oil prices over 2012 and 2013 are expected to encourage exploration activity and increase the economic viability of extraction from new oil fields. The majority of new oil field developments, particularly in non-OPEC regions, have higher development and production costs compared with existing fields. New offshore fields are generally further below the seabed and a greater distance from shore, while onshore oil fields increasingly exploit unconventional resources. As the technology and industry knowledge used to develop new oil fields improves and becomes more readily available, development and extraction costs of these oil fields are likely to fall, potentially limiting significant increases in oil prices over the medium term.

Moderate growth in world oil consumption over the medium term

In 2011, world oil consumption averaged 89.1 million barrels a day, an increase of 0.8 per cent relative to 2010. Consumption growth in 2011 reflected robust consumption growth in non-OECD economies that was offset by lower consumption in the OECD. Demand for oil decreased in the US and Europe in 2011, reflecting weak economic growth and decreases in oil intensity of economic growth.

World oil consumption is forecast to increase marginally in 2012, reflecting an assumed weak world economic outlook. Beyond 2012, world economic growth is assumed to strengthen. In 2013, world oil consumption is forecast to increase by 1.4 per cent, with oil consumption in non-OECD economies surpassing consumption in the OECD (see Figure 4). Over the remainder of the outlook period (2014 to 2017), world oil consumption is projected to increase at an average rate of 1.1 per cent a year, to reach 95.4 million barrels a day in 2017. Increases in world consumption are projected to be characterised by moderating oil consumption growth in non-OECD economies and continuing falls in OECD consumption.

Figure 4: Oil consumption in OECD and non-OECD economies


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Robust consumption growth in non-OECD economies

In 2012, oil consumption within non-OECD economies is expected to grow 2.7 per cent, relative to 2011, to average 44.6 million barrels a day. From 2013, stronger assumed economic growth in most non-OECD economies is forecast to support robust growth in industrial production, transport fleets and, therefore, oil demand. In 2013, non-OECD oil consumption is forecast to increase by a further 3.3 per cent to average 46.1 million barrels a day. Over the remainder of the outlook period (2014 to 2017), oil consumption growth in non-OECD economies is projected to average 2.9 per cent a year, as oil use intensity falls with projected persistent high prices. Non-OECD Asia is projected to account for the majority of total non-OECD consumption growth over the outlook period, with economic growth in Asia assumed to rise faster than elsewhere.

China’s oil consumption averaged 9.5 million barrels a day in 2011, an increase of 5 per cent from 2010. In February 2012, China’s National Development and Reform Commission increased the ceiling on China’s petrol and diesel prices for the first time in ten months, by 3 and 4 per cent, respectively. Nevertheless, the price of petroleum products remains low by international standards. In 2012 and 2013, China’s oil consumption growth is forecast to grow by 4 per cent and 5 per cent, respectively, to reach 10.4 million barrels a day in 2013. Consumption is expected to be supported by domestic price controls, strengthening economic growth and demand for China’s exports.

China’s oil consumption is projected to increase at an average annual rate of 4 per cent from 2014 to total 12.3 million barrels a day in 2017. Despite being the world’s second largest oil consumer, China’s per capita consumption of oil is around half of the world average. Strong assumed economic growth in China over the medium term is projected to result in rising income per capita, an expansion of both ground and air transportation fleets and a growing petrochemical sector. However, China’s economic growth is expected to become progressively less oil intensive, as high oil prices encourage energy efficiency and the substitution of residual fuel oil for natural gas in electricity generation. Under its current five year plan (2011–2015), China has targeted a 16 per cent reduction in the energy intensity of its economy that may even result in a decline in per capita oil consumption.

Oil consumption in India is projected to increase by an average annual rate of 3 per cent to be 4.2 million barrels a day by 2017. Projected growth in oil consumption is underpinned by a young population demographic and a growing middle class. Over the medium term, India’s working age population is expected to expand by an average of 1.6 per cent a year and support demand for consumption of petroleum fuels for transport.

Sustained economic growth in the Middle East is expected to support increases in the region’s oil consumption. The expansion of electricity generation capacity to support increases in economic activity, combined with limited availability of natural gas, is likely to continue to underpin consumption growth of residual fuel oil in power plants. Widespread end-user fuel subsidies are also unlikely to be dismantled

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during the outlook period and are expected to insulate consumers from high oil prices. In 2012, oil consumption in the Middle East is forecast to increase by 3 per cent, relative to 2011, to reach 8.2 million barrels a day. Over the remainder of the outlook period (2013 to 2017), oil consumption growth is projected to average 3 per cent a year to reach 9.7 million barrels a day in 2017.

OECD oil consumption to fall over the medium term

OECD oil consumption is forecast to contact 0.9 per cent to average 45.2 million barrels a day in 2012. Lower consumption in the US and Europe will be partially offset by increased consumption in the Pacific region (Japan, Republic of Korea, Australia and New Zealand). In 2013, oil consumption is forecast to fall marginally in all three OECD regions. For the remainder of the outlook period, OECD oil consumption is projected to decrease at an average annual rate of 0.7 per cent to average 43.8 million barrels a day by 2017.

Oil consumption in Europe has declined steadily since 2006, reflecting weak economic growth since the global financial crisis, continued efficiency gains in the transport sector and declining use of oil in electricity generation and heating. The declining trend is projected to continue over the outlook period. Short term falls in consumption are expected to be magnified by weak economic growth following market concerns related to sovereign debt. In 2012, European oil consumption is forecast to contract by 2.4 per cent to 13.9 million barrels a day. Between 2013 and 2017, oil consumption is projected to decrease at an average annual rate of around 1 per cent, falling to 13.3 million barrels a day by 2017.

North American oil consumption fell 1.1 per cent in 2011, relative to 2010, to average 23.5 million barrels a day, due to lower gasoline consumption in the US. In 2012, as economic growth remains weak, North American oil consumption is forecast to contract by a further 0.5 per cent to 23.4 million barrels a day. Over the medium term, North American oil consumption is projected to decline at an average annual rate of 0.5 per cent to reach 22.8 million barrels by 2017. Declines are projected to be underpinned by structural changes in the transport sector, including more stringent fuel economy standards, increasing sales of electric vehicles, and a growing share of flex-fuel vehicles, which will reduce oil-based gasoline demand and increase ethanol consumption.

Figure 5: US motor gasoline and ethanol consumption


Oil consumption in the Pacific region is projected to increase in the short term and decline over the medium term. Changes in oil consumption are expected to largely reflect developments in Japan, the largest oil consuming country in the Pacific region. In 2011, Japan’s oil consumption increased by 0.9 per cent to 4.5 million barrels a day, underpinned by increased use of residual fuel oil for electricity generation following the loss of earthquake damaged nuclear power generation

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capacity. Japan’s oil consumption is forecast to increase by an additional 0.8 per cent in 2012 supported by the continued use of oil-fired capacity as nuclear facilities remain shut for maintenance and stress tests, and industrial production increases associated with post-earthquake reconstruction.

From 2013 to 2017, oil consumption in Japan is projected to contract at an average annual rate of 0.6 per cent due to vehicle fuel efficiency increases and as a result of natural gas, coal or nuclear replacing high cost oil-fired electricity generation. Similarly, oil consumption in the Republic of Korea is projected to fall by around 1 per cent a year in line with efficiency gains and declining use of kerosene for heating. Oil consumption in the Pacific region is projected to fall from 7.9 million barrels a day in 2011 to 7.7 million barrels a day in 2017.

World oil supply growth to be underpinned by OPEC production beyond 2012

World oil production increased by 1.2 per cent in 2011, to average 88.5 million barrels a day. In 2012, production is forecast to increase by an additional 1.5 per cent to average 89.8 million barrels a day, with non-OPEC output accounting for around two thirds of incremental increases in production. Oil production growth in non-OPEC economies is forecast to stall in 2013, while OPEC production is forecast to increase by 4 per cent to average 37.5 million barrels a day. World oil production in 2013 is forecast to increase by 1.4 per cent to 91.1 million barrels a day.

For the reminder of the outlook period, world oil production is projected to increase at an average annual rate of 1.1 per cent to reach 95.4 million barrels a day in 2017. Non-OPEC production is projected to increase marginally, while OPEC production is projected to increase at an average annual rate of 1.8 per cent to reach 40.3 million barrels a day in 2017. Capacity increases in Iraq, Angola and the UAE are expected to support OPEC production growth.

Strong growth in non-OPEC production during 2012

Non-OPEC production remained relatively stagnant in 2011 as a result of increased production in North America that was offset by lower than expected output due to maintenance and unplanned outages in the North Sea, Canada and the Middle East. Non-OPEC production in 2012 is forecast to increase by 2 per cent, relative to 2011, to average 53.6 million barrels a day. Increases in non-OPEC oil production are expected to be concentrated in North America and Latin America.

Over the medium term, growth in non-OPEC oil production is forecast to slow. Between 2013 and 2017, non-OPEC oil production is projected to grow at an average annual rate of 0.5 per cent to reach 55.1 million barrels a day.

Incremental increases in non-OPEC oil production over the outlook period are projected to be greatest in North America. Production growth is projected to be underpinned by greater production in the US and Canada, offsetting falling production in Mexico.

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Oil production in the US over 2012 and 2013 is forecast to increase at an average rate of 2 per cent a year to reach 8.4 million barrels a day in 2013. Increases in ‘tight oil’ (see Box 1) production primarily from the Bakken, Nicobara and Eagle Ford formations are forecast to offset lower production from maturing conventional fields in Alaska and California. Towards the end of the outlook period, continued expansion of the tight oil industry and additional production from the Gulf of Mexico are expected to contribute to increased US oil production provided that issues with the allocation of drilling permits are resolved. In 2017, US oil production is projected to grow to 9.1 million barrels a year, an increase of 13 per cent relative to production in 2011.

Canada’s oil production is forecast to increase by 6 per cent in 2012 and 4 per cent in 2013 to reach 3.8 million barrels a day in 2013. Production growth in the short term is expected to be supported by enhanced recovery of conventional crude oil in the Western Canadian Sedimentary Basin as a result of the recent success of horizontal drilling and multi-stage fracturing techniques.

Growth in Canada’s oil production over the medium term is attributed to increases in unconventional oil production, partially from oil sands projects. Increased production is expected from the expansion of existing oil sands projects such as CNRL’s Horizon project and Suncor’s Firebag project, and the commencement of new projects. Imperial’s Kearl Lake mining project is due to start operation in late 2012 at 110000 barrels a day and ramp up to 345000 barrels a day after 2017. Husky’s Sunrise Energy project is due to commence production of 60000 barrels a day in 2014, ramping up to 200000 barrels a day. Canada’s oil production between 2014 and 2017 is projected to increase at an average annual rate of 8 per cent to reach around 5.2 million barrels a day, with oil sands accounting for around two thirds of total production.

Oil production from Latin America is projected to be the second largest source of growth in non-OPEC over the medium term, largely supported by new projects in Brazil.

In Brazil, oil production in 2012 is forecast to increase by 7 per cent to 2.3 million barrels a day, underpinned by production from several of Petrobas’ new offshore projects that are due to commence in the second half of the 2012. These projects include Baleia Azul, Tiro Sidon, Roncador module 3 and Guará, which have a combined peak capacity of 480000 barrels a day. Growing production from these projects and other projects due to commence in 2013, such as Parque das Beleias, Papa-Terra and Roncador module 4, are expected to support a 2 per cent increase in Brazil’s oil production, which is forecast to total 2.4 million barrels a day in 2013.

For the remainder of the outlook period, Brazilian oil production is projected to increase at an average annual rate of 7 per cent. Production increases will be underpinned by the installation of additional production systems in several offshore oil fields including Baleia Azul, Guara North, Cernambi, Lula Central, Lula High and Maromba, which combined have a peak capacity of 760000 barrels a day. In 2017, Brazilian oil production is projected to average 3.2 million barrels a day.

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Oil production in the Russian Federation is projected to remain relatively unchanged over the medium term, despite changes to its oil export taxes in October 2011 that enhanced the profitability of upstream projects. Production from the Russian Federation is projected to fall from 10.6 million barrels a day in 2011 to 10.4 million barrels a day in 2017. Decreased production from maturing fields in Western Siberia is projected to offset production growth from new oil fields in Eastern Siberia.

Box 1: Unconventional oil not so unconventional

Unconventional oil is set to play a growing role in world oil production. High oil prices over the medium term are projected to encourage exploration development activity by improving the economic viability of unconventional methods. Generally, the cost of producing unconventional oil is higher compared with conventional oil.

The IEA presently characterises unconventional oil as including extra-heavy oil (also known as natural bitumen or oil sands), kerogen oil, and derived liquids such as coal-to-liquid (CTL) or gas-to-liquid (GTL). Interestingly, tight oil, which is produced increasingly in the US, is considered conventional oil, but its producers face challenges similar to producers of unconventional oil.

Extra-heavy oil

The extraction of extra-heavy oil—or bitumen—from a deposit generally requires heat to reduce viscosity. The world’s largest deposit of extra-heavy oil is found as naturally occurring bitumen in Canadian oil sands at shallow depths. Canada’s largest oil sands deposits, which are located in Athabasca, Cold Lake and Peace River, contain an estimated 170 billion barrels of recoverable oil. These deposits can be extracted using two alternative methods: mining and in-situ. Mining is used to extract oil sands that are on or near the surface and the ore is treated with hot water to separate the bitumen. The in-situ method is used for deeper deposits. It employs steam-injection technology and solvents to reduce the viscosity of bitumen before extraction.

Extra-heavy oil is also found in the Venezuela Orinoco belt, which is the world’s second-largest deposit of extra-heavy oil. The deposits are generally deeper than in Canada, and oil is extracted using in-situ methods.

Kerogen oil

Kerogen oil is often referred to as ‘oil shale’, but should not be confused with ‘shale oil’. Kerogen oil is derived from sedimentary rock containing kerogen, which when heated and processed releases hydrocarbons similar to oil. Deposits near the surface are mined in a similar way to oil sands and the environmental challenges are comparable. The costs of producing kerogen oil are high due to the amount of energy required to heat the shale to between 350°C and 450°C before oil can be extracted. Only around 15000 barrels of kerogen oil is currently produced worldwide.

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CTL

Coal-to-liquid is a process of deriving oil from coal, usually via the gasification of coal into syngas. While the technology is well established, CTL is one of the most costly sources of unconventional oil. South Africa is the most notable producer of CTL, with a facility that produced 160000 barrels a day at capacity. Two commercial scale CTL projects are being proposed in Australia. The Amber CTL project, has an expected capacity of around 20000 barrels a day and is scheduled for completion in 2014. The Clinton project has a capacity of 15000 barrels a day and is scheduled for completion in 2015.

GTL

Gas-to-liquid technology is similar to CTL, uses the reaction of natural gas with steam and oxygen to create syngas. The Pearl GTL project in Qatar commenced in 2011 and is expected to ramp up to peak capacity of 140000 barrels a day in 2012. Currently low gas prices in North America have reignited interest in GTL, with a feasibility study underway for a GTL plant fed by shale gas in Louisiana.

Tight oil

Tight oil is also known as ‘shale oil’. It is conventional oil trapped in geological formations with low permeability (e.g. shale rock). Special techniques including horizontal wells and multi-stage hydraulic fracturing are used to extract tight oil. Growth in tight oil production is most prominent in the US, from the Bakken formation around the North Dakota, Montana and Canadian boarders, the Eagle Ford formation in Texas, and the Niobrara formation on the boarder of Wyoming and Colorado.

Impediments to growth in unconventional and tight oil

By 2017 unconventional and tight oil are projected to account for 7 per cent of world oil production, up from 4 per cent in 2010. However, growth in production could be limited by lower crude prices, increased extraction costs including specialist services, infrastructure constraints and environmental costs. The future of unconventional and tight oil production over the longer term will be increasingly shaped by market conditions and policy responses to infrastructural and environmental concerns.

OPEC oil production underpinned by NGL in the short term

OPEC oil production is forecast to increase by around 1.2 per cent in 2012 to average 36.2 million barrels a day. Increases in OPEC oil production are forecast to be underpinned by growth in the production of natural gas liquids (NGL), while OPEC crude oil production is expected to remain largely unchanged. In 2013, as non-OPEC production stalls, OPEC oil will meet any expected gap. OPEC oil production is forecast to increase by 4 per cent in 2013 to average 37.5 million barrels.

Between 2014 and 2017, OPEC oil production is projected to increase at an average annual rate of 1.8 per cent. Growth in OPEC NGL is projected to weaken towards the

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end of the outlook period, with OPEC crude oil production comprising an increasing share of additional OPEC oil production.

OPEC crude oil production is forecast to be underpinned by increased output from Iraq. By the end of 2012, Iraq’s oil producing capacity is expected to reach 3.1 million barrels a day, up 14 per cent from an average production rate of 2.7 million barrels a day in 2011. Oil output from the Rumaila, West Qurna-1, and Zubair oil fields, which together accounted for over two thirds of Iraqi production in 2011, is expected to support Iraq’s oil growth. Iraq’s national oil company plans to further expand these fields further over the medium term. Official production targets for Iraqi oil production are ambitious at 6.5 million barrel a day by 2015 and 12 million barrels a day by 2017. Export infrastructure and logistical constraints are likely to limit output growth to below official targets. Between 2014 and 2017, Iraq’s oil production growth is projected to increase at an average annual rate of 6 per cent to reach 4.3 million barrels a day in 2017.

Libyan crude oil production has increased significantly since the end of the 2011 civil war. Libyan production in the December quarter of 2011 averaged 550000 barrels a day, 12 times higher than it was in the September quarter. Libyan crude oil production is projected to rebound to pre-civil war levels of around 1.6 million barrels a day by early 2014. For the remainder of the outlook period, growth in Libyan crude oil production is projected to slow and reach 1.9 million barrels a day in 2017.

Increases in crude oil production in the UAE and Angola are projected over the outlook period. Over a dozen new projects in Angola are expected to offset production declines in more mature offshore fields and support an annual growth rate of 3 per cent over the outlook period. By 2017, crude oil production in Angola is projected to average 1.9 million barrels a day. In the UAE, crude oil production is projected to increase 4 per cent a year to reach 3.1 million barrels a day by 2017. Production growth in the UAE is expected to be supported by increased output from the Upper Zakum and Lower Zakum fields, and greater production from mature onshore fields following the employment of enhanced oil recovery techniques.

Oil production in Saudi Arabia during 2011 averaged 9 million barrels a day, well below its capacity of 12 million barrels a day. Saudi Arabia’s production capacity is projected to fluctuate between 11.6 and 12 million barrels a day over the outlook period. Forecast falls in capacity during 2012 and 2013 reflect lower output from maturing fields. Projected increases in 2015 will be underpinned by the expected development of the second phase of the Manifa project. By 2017, Saudi Arabian oil production is projected to average 8.7 million barrels a day.

Iran’s crude oil production is projected to decrease at an average annual rate of 5 per cent over the outlook period. International oil sanctions recently imposed on Iran’s oil exports may have several effects. They are likely to lead to a redistribution of its oil trade with Iran’s exports being redirected from Europe to China and India, cause a discount in the price of Iran’s oil, contribute to the flight of foreign investment, and reduce the number of projects coming online before 2017.

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Production declines from maturing oil fields are projected to offset new production from several small capacity projects.

Production of NGLs by OPEC is forecast to increase by 10 per cent and 6 per cent in 2012 and 2013, respectively, as projects in Qatar, Saudi Arabia and the UAE ramp up to peak capacity. For the remainder of the outlook period, growth in OPEC production of NGLs is projected to slow to 3 per cent a year, and average 7.5 million in 2017. Production growth is expected to be supported by new projects in Iran, the UAE and Saudi Arabia including the Integrated Gas Development project and the Manifia project.

Box 2: Downside risk: the Strait of Hormuz

On 27 December 2011, the Iranian Government threatened to block the transportation of oil through the Strait of Hormuz, limiting trade of oil between producers in the Middle East and consumers in Asia. The threat was made in retaliation to proposed international sanctions designed to prevent the exportation of Iranian oil and to persuade the Iranian Government to cease its alleged nuclear weapons program.

Around one fifth of the world’s crude oil is transported by tankers from ports in the Persian Gulf through the Strait of Hormuz. The closure of the Strait would result in considerable increase in import prices throughout Asia and the Pacific due to the limitations of alternative transport routes and already constrained supply to the region.

In the highly unlikely event that Iran carried out its threat and was successful at blocking the Strait of Hormuz, oil import prices in Asia would likely increase, and result in lower than forecast growth in oil consumption. Price increases would depend on the length of the closure and the response by the international community.

According to the IEA, most military analysis believe that any closure of the Strait of Hormuz would be short term, as the US is unlikely to allow the Strait to be closed given its importance to global energy markets.

Australian production and exports declining until 2015–16

Australian production of crude oil and condensate is forecast to contract by 4 per cent in 2011–12 to 23.7 gigalitres. Lower production reflects planned shut-ins on the North West Shelf that occurred in the September quarter 2011 and declines from maturing fields. Output from the Kitan project in the Bonaparte Basin, which commenced in October 2011, is expected to partially offset these declines. In 2012–13, Australian crude oil and condensate production is forecast to increase by 1 per cent as a result of the commencement of crude production from the Montara/Skua project and condensate from the Kipper gas project.

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From 2013–14 to 2015–16, Australian production of crude oil and condensate is projected to decrease at an average annual rate of 6 per cent. Declining production from maturing fields is projected to more than offset new production from several small fields including Coniston, Fletcher-Finucan, Turrum, Crux and Balnaves. In 2016–17, Australia’s crude oil and condensate production is projected to rebound by 8 per cent to 19.1 gigalitres, underpinned by condensate production associated with the Prelude and Ichthys projects.

Australian exports of crude oil and condensate over the outlook period are projected to follow a similar profile to production. Exports are forecast to contract by 4 per cent in 2011–12 and a further 1 per cent in 2012–13 to total 18.7 gigalitres, reflecting lower production from the north-west coast of Australia. From 2013–14 onwards, oil exports are projected to decline at an average rate of 6 per cent a year to total 13.9 gigalitres in 2016–17.

The value of Australian oil exports is forecast to increase to $12.6 billion in 2011–12, reflecting forecast higher prices compared with 2010–11. Between 2012–13 and 2015–16, the real value of Australian oil exports are projected to decline to by 12 per cent a year, reflecting projected lower export volumes (see Figure 6). In 2016–17, Australia’s oil export earnings are projected to increase to $8 billion (in 2011–12 dollars), supported by condensate exports from the Prelude and Ichthys projects.

Figure 6: Australian crude oil and condensate exports


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Table 1: Oil outlook2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

WorldProduction b mbd 88.8 89.8 89.8 91.1 92.2 93.3 94.3 95.4Consumption mbd 88.3 89.2 89.8 91.1 92.2 93.3 94.3 95.4West Texas Intermediate crude oil price– nominal US$/bbl 79 95 105 114 115 113 112 112– real c US$/bbl 85 98 105 112 111 108 107 105Brent dated crude oil price– nominal US$/bbl 79 110 117 119 117 113 112 111– real c US$/bbl 85 114 117 117 114 109 106 104

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaCrude oil and condensate

Production b ML 25583 i

24752 i 23690 23905 23743 20944 17713 19059

Export volume ML 18064 19638 18944 18682 18252 15560 12652 13945Export value– nominal A$m 9534 11772 12621 12698 12893 10699 8435 9152– real d A$m 10159 12166 12625 12350 12195 9841 7545 7961Imports ML 27284 31766 30326 30999 26663 26858 27269 27303LPGProduction e ML 4097 3907 3915 3841 3815 3365 2846 3062Export volume ML 2776 2471 2281 2237 2222 1960 1658 1784Export value– nominal A$m 1105 1068 1040 1113 1147 985 808 856– real d A$m 1177 1103 1040 1082 1085 906 723 745Petroleum productsRefinery production ML 37200 38393 37993 37907 33963 34048 34133 34218

Exports g ML 850 760 804 1232 1104 1106 1109 1112Imports ML 19967 18762 21393 19961 24972 25970 26968 28100Consumption h ML 50929 52095 53516 53541 54489 55458 56499 57465

b One megalitre a year equals approximately 17.2 barrels a day. c In 2012 US dollars. d In 2011–12 Australian dollars. e Primary products sold as LPG. g Excludes LPG. h Domestic sales of marketable products. i Energy Quest. f BREE forecast. z BREE projection.Sources: BREE; ABS; IEA; Energy Information Administration (US Department of Energy); Energy Quest; Geoscience Australia.

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Gas

Nina Hitchins

Global gas consumption is projected to increase at an average annual rate of 3 per cent over the outlook period, underpinned by increasing use of gas in electricity generation.

Imports of LNG into Asia-Pacific region are projected to increase by an average of 8 per cent a year to reach 241 million tonnes in 2017. China is projected to account for a third of the total increase in the region’s LNG imports.

Projected increases in the global demand for LNG and the establishment of binding long-term contracts to secure future supplies have underpinned investment in additional liquefaction capacity. Global liquefaction capacity is projected to increase at an average annual rate of 5 per cent, to reach 366 million tonnes a year by the end of 2017.

Australia’s LNG export earnings are projected to increase by an average of 20 per cent a year to total $30 billion (in 2011–12 dollars) in 2016–17. The growth will be underpinned by higher export volumes supported by the start up of 66 million tonnes a year of additional LNG production capacity over the outlook period.

Growth in world gas consumption to continue

Over the last decade, global gas consumption increased at an average annual rate of 3 per cent and totalled 3.3 trillion cubic metres in 2010. These trends are expected to continue over the medium term, with the International Energy Agency (IEA) projecting world gas consumption to reach 3.8 trillion cubic metres by 2016. Historical and projected increases in gas consumption reflect greater use of gas in electricity generation, industrial production and in the residential sector.

Gas-fired electricity is an attractive option because it is characterised by low capital expenditure, short construction times, flexibility in meeting peak demand, and low carbon emissions relative to other fossil fuels. While the majority of global increases in gas demand are projected to be used in electricity generation, the extent of gas use in the electricity sector will depend on the price of gas relative to alternative fuels, as well as domestic policy settings regarding nuclear energy, renewable energy and carbon pricing.

The majority of incremental gas consumption is projected to occur in emerging economies, where gas-fired energy is projected to support strong economic growth. Expanding gas distribution networks are also inducing a switch away from more expensive heating fuels such as kerosene. Demand for gas in more mature OECD markets is projected to increase moderately, reflecting the increasing share of gas used in the electricity generation sector.

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LNG to underpin global trade growth

The majority of the world’s gas production is confined to a few regions including the Former Soviet Union, North America and the Middle East. Gas consumption, however, is more decentralised and many regions supplement domestic gas production with imports. Projected increases in global gas consumption, centralised production and associated regional price disparities are projected to underpin an expansion of global gas trade.

Investment in inter- and intra-regional transport capacity will facilitate trade and enable greater gas consumption, particularly in Asia. Greater transport capacity will take the form of additional pipelines and the construction of LNG liquefaction and regasification terminals. LNG trade in 2010 totalled 209 million tonnes and represented 9 per cent of global gas consumption, an increase from 6 per cent in 2000.

LNG is projected to comprise an increasing proportion of global trade over the medium term, as it can be transported over longer distances and allows for a greater diversification of supply compared with gas transported through pipelines.

Grow in Asia-Pacific LNG imports to continue

LNG markets are of particular interest in an Australian context as the geographical distance between Australia and its export markets prevents the transportation of gas via pipelines. Australia’s LNG exports are delivered mainly to Japan, the Republic of Korea, Chinese Taipei and China. These markets accounted for over half of world LNG imports in 2010.

In 2011, world LNG trade increased by 14 per cent, relative to 2010, to total 238 million tonnes. Growth of LNG imports was greatest in the Asia-Pacific region, and is estimated to have increased by 16 per cent to total 148 million tonnes. In all Asia-Pacific economies, LNG imports are increasingly used to supplement insufficient domestic gas supplies to meet growing demand. In Japan, increases in LNG imports were underpinned by greater gas-fired electricity generation following the March 2011 earthquakes and tsunami and the subsequent closure of most of its nuclear facilities.

Asia-Pacific imports of LNG are forecast to increase by 14 per cent in 2012 to reach 168 million tonnes, supported by stronger gas-fired electricity generation and higher industrial and residential consumption in existing and emerging LNG importing economies. In 2013, growth of LNG imports into the Asia-Pacific region are forecast to slow to 8 per cent and to total 181 million tonnes. Increased LNG imports into the Republic of Korea, China, India and Chinese Taipei are forecast to offset a decline in Japan’s imports (see Figure 1).

Figure 1: LNG imports into the Asia-Pacific


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Asia-Pacific imports are projected to constitute an increasing proportion of global LNG trade over the medium term. From 2014 to 2017, Asia-Pacific imports of LNG are projected to increase at an average of 7 per cent a year, to reach 241 million tonnes by 2017, reflecting the increasing importance of gas in electricity generation, and greater direct consumption in the residential sector and industrial sector.

Japan is currently the largest LNG importer in the world. In the absence of domestic gas production and international pipelines, Japan is completely reliant on LNG imports to meet domestic consumption requirements. In 2011, Japan’s LNG imports increased by 12 per cent, relative to 2010, to total 78 million tonnes. Robust growth in LNG imports followed the March 2011 earthquakes and tsunami that ultimately led to the closure of most of Japan’s nuclear reactors for stress tests. At the end of February 2012, only two reactors with a combined capacity of 2227 MW were operating in Japan. The remaining 49 reactors were inoperative either as the result of government imposed stress tests or because of planned maintenance. The two online generators are due to close for inspection and maintenance in the first half of 2012. Assuming local authorities allow the restart of around 15 nuclear power stations that have passed stress tests in the second half of 2012, Japan’s imports of LNG are forecast to increase by 2 per cent in 2012 and decrease by 6 per cent in 2013 to total 74 million tonnes.

Projections of Japan’s LNG imports over the medium term are largely dependant on government policies that will dictate if and when nuclear capacity is restarted. Assuming all remaining 36 reactors reopen over the outlook period, Japan’s LNG imports are projected to increase at an average annual rate of 2 per cent from 2014 to total 80 million tonnes in 2017.

Like Japan, the Republic of Korea’s supply of gas consists entirely of LNG imports. In 2011, the Republic of Korea’s imports of LNG increased by an estimated 12 per cent to total 33 million tonnes, underpinned by a rise in gas use for electricity generation and growing consumption of residential and commercial gas. In 2012 and 2013, the Republic of Korea’s LNG imports are forecast to increase by 7 per cent to total 38 million tonnes in 2013. Increasing imports reflect an expectation that gas will continue to play a critical role in peak load electricity generation and the implementation of a policy designed to expand the gas distribution network. Over the remainder of the outlook period (2014 to 2017), however, fewer proposed expansions of power generation facilities will moderate the growth in gas in the electricity sector. Furthermore, infrastructure expansions designed to increase residential and commercial access to gas early in the outlook period are projected to reduce potential growth in LNG consumption towards the end of the outlook period. From 2014 to 2017, the Republic of Korea’s LNG imports are projected to increase at an average annual rate of 2 per cent to total 42 million tonnes in 2017.

China’s gas consumption is projected to rise from 112 billion cubic metres in 2010 to reach 260 billion cubic metres by 2015. According to the IEA, the Chinese Government is aiming to increase the share of gas in domestic energy consumption to 8 per cent in 2015, by promoting its use in transportation, electricity generation and for residential use. While Chinese state-owned oil firms are focusing on

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developing domestic gas supply to meet rising demand, the IEA projects that China’s gas production will equate to around half of the growth in domestic consumption. The remaining component of demand is likely to be met by increasing imports.

In general, pipelines are the most cost effective means of importing gas into China. Pipelines are extensively used to import gas into China’s northern and western provinces. However, in the southern and eastern provinces, the long distances to gas-consuming centres via pipeline make LNG imports more cost effective. Regasification capacity is expected to constrain increases in China’s LNG imports over the outlook period. In 2012, China’s LNG imports are forecast to increase 30 per cent to total 16 million tonnes, reflecting additional capacity at the Zhejiang Ningbo and Dalian facilities. In 2013, LNG imports are forecast to grow by an additional 13 per cent to total 19 million tonnes. Increases in LNG imports are forecast to be supported by the expected commissioning of the Zhuhai Jinwan and Tangshan facilities, but will be moderated by the completion of the Myanmar-China pipeline. Between 2014 and 2017, several additional LNG projects are scheduled to start up underpinning China’s LNG imports over medium term. Combined, these projects are expected to support 37.3 million tonnes of LNG imports into China in 2017.

India’s gas consumption is projected to increase over the medium term, due to increased gas use in the electricity and industrial sectors. Greater gas consumption will need to be met by increases in domestic production and imports. In 2012, India’s domestic gas production is forecast to fall as a result of continued operational problems in the Krishna-Godavari Basin. While India is expanding pipeline capacity over the medium term, LNG imports are forecast to supplement supply in the short term. In 2012, LNG imports into India are forecast to increase by 19 per cent, relative to 2011, to total 13 million tonnes. Increases in LNG imports will be supported by growth in India’s regasification capacity.

Between 2013 and 2017, imports of LNG into India are projected to increase at an average annual rate of 5 per cent to reach 16 million tonnes in 2017. Over the medium term, growth rates of India’s LNG imports are projected to ease as additional pipeline capacity is constructed.

Demand for LNG in Chinese Taipei is projected to increase over the medium term, as a result of a change in the government’s energy policy announced in November 2011. The Chinese Taipei government has proposed to phase out nuclear power in response to the March 2011 earthquakes and tsunami in Japan. The commissioning of the 2700MW Lungmen nuclear plant has been delayed until 2014 to allow more time to conduct strict safety checks. In the meantime, gas-fired electricity generation capacity is assumed to operate at a higher utilisation rate to meet increasing electricity demand. In 2012, LNG imports into Chinese Taipei are forecast to increase 7 per cent to 13 million tonnes. From 2013, Chinese Taipei will be entitled to an additional 1.5 million tonnes a year from Qatar under contract, reducing spot market demand. Between 2014 and 2017, additional demand for gas will reflect the possible closure of nuclear electricity generating capacity and its substitution with gas-fired capacity. During this period, LNG imports into Chinese Taipei are projected to increase 6 per cent a year to reach 17 million tonnes in 2017.

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Imports into the Asia-Pacific region are expected to be further supported by growing demand from Asian economies that, prior to 2011, did not import LNG. These countries include Thailand, Malaysia, Singapore and Vietnam. Combined, these nations are projected to import 25 million tonnes of LNG by 2017.

Growing world LNG supply to be underpinned by Australian liquefaction capacity

Projected increases in the global demand for LNG and the establishment of binding long term contracts to secure future supplies have underpinned investment in additional liquefaction capacity. Given long construction times, projections of global liquefaction capacity growth over the outlook period are based on projects that are either committed or under construction. In 2012 and 2013, global liquefaction capacity is forecast to increase by 3 per cent each year to reach 296 million tonnes a year in 2013, underpinned by projects in Australia, Angola and Algeria. Over the remainder of the outlook period (2014 to 2017), global liquefaction capacity is projected to increase at an average annual rate of 5 per cent, to reach 366 million tonnes a year by the end of 2017 (see Figure 2).

Figure 2: Global LNG liquefaction capacity


As of February 2012, 14 liquefaction projects were committed or under construction around the world, eight of which are located in Australia. Australia LNG liquefaction capacity is projected to increase four fold over the outlook period to total 85 million tonnes in 2017. Most of this additional capacity is scheduled to come online after 2014.

In 2012, Australia’s liquefaction capacity is expected to increase to 24 million tonnes a year, with the completion of the first train at the 4.3 million tonne Pluto project. Between 2014 and 2015, three coal seam gas LNG projects, with a combined capacity of 25 million tonnes, are scheduled to start up: the Australia Pacific LNG project (APLNG), the Queensland Curtis LNG project and the Gladstone LNG project. While funding has only been committed for the first train of the APLNG project, a positive foreign investment decision is assumed on the second train in the first quarter of 2012, given the establishment of binding sales and purchase agreements. The remaining LNG projects scheduled for completion include Gorgon (15 million tonnes, in 2014/15), Wheatstone (8.9 million tonnes, in 2016), Prelude (3.6 million tonnes, in 2016/17) and Ichthys (8.4 million tonnes, in 2016/17).

New liquefaction facilities are also being constructed in Papua New Guinea (PNG), Indonesia, Algeria and Angola over the outlook period, with a combined capacity of 23 million tonnes a year.

In 2012, Angola’s first LNG project, Angola LNG, is expected to be completed, with a production capacity of 5.2 million tonnes a year. Algeria’s LNG production capacity is

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expected to increase by 9 million tonnes following the completion of the Gassi Touil LNG project and a new train as part of the Skikda project in 2013. In 2014, the PNG LNG project and the Donggi Senoro project in Indonesia are due to be completed, with a capacity of 6.6 million tonnes and 2 million tonnes, respectively.

Box 1: North American LNG export potential and the Panama Canal expansion

Increasing production of unconventional gas in the US in recent years has increased the domestic supply of gas, and put downward pressure on local prices. As of November 2011, US LNG import prices were around US$4 per MBtu, an estimated discount of US$5-8 per MBtu relative to Europe, and US$13 per MBtu relative to Japan (see Figure 3).

Figure 3: Regional gas prices


While the price disparity between the Atlantic and Asia-Pacific LNG markets will encourage LNG re-exports from North America to Asia, the cost and time of transportation around the Cape of Good Hope is a limiting factor.

These transportation costs will be reduced in 2014 when a US$5.3 billion expansion project for the Panama Canal is due to be completed. The project is expected to increase the width of the canal, allowing it to accommodate LNG vessels transporting LNG from the Atlantic market to the Asia-Pacific market. The expansion is likely to reduce transport costs and travel time to the Asia-Pacific market.

The growing regional gas price disparity over recent years, combined with plans to widen the Panama Canal, have increased the attractiveness of investment opportunities in the US to re-export LNG, and to export domestically produced LNG. Several companies have received federal government approval to re-export LNG, after it is imported in accordance with long-term contracts and minimal operational requirements.

As of February 2012, nine companies had applied to the US Department of Energy (DOE) to export a combined quantity of 104 million tonnes of domestically produced LNG a year (see Table 1). The only company to have obtained approval to export to both FTA and non-FTA countries was Cheniere Energy, the owner of the Sabine Pass terminal. Cheniere Energy is proposing to build a liquefaction facility at the terminal, where it already re-exports LNG.

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Table 1: Applications received by DOE to export US produced LNG

Project

Export quantity (Mt a year)

Exports to FTA countries

Exports to non-FTA countries

Sabine Pass Liquefaction 17 Approved Approved

Freeport LNG Expansion 21 Approved Under DOE Review

Lake Charles Exports 15 Approved Under DOE Review

Carib Energy <1 Approved Under DOE Review

Dominion Cove Point LNG 8 Approved Under DOE Review

Jordan Cove Energy Project 9 Approved na

Cameron LNG 13 Approved Under DOE Review

Gulf Coast LNG Export 21 Under DOE Review Under DOE Review

Cambridge Energy <1 In process na

Total 104

Source: DOE.

The Sabine Pass Liquefaction project, the Freeport LNG expansion project and the Lake Charles Exports project are the most advanced of proposed US LNG export proejcts. Cheniere Energy entered into sales and purchase agreements to supply customers in the Republic of Korea, India, the UK and Spain with a total of 16 million tonnes of LNG a year from the Sabine Pass facility. If the Sabine Pass, Freeport and Lake Charles projects proceed as scheduled, the US could become a net exporter of LNG by 2016.

Meanwhile, Canadian exporters of LNG are looking to diversify their exports markets, as the import needs of the US decrease. Apache has gained approval from Canada’s National Energy Board to export 5 million tonnes a year from its proposed Kitimat plant and the LNG Group has gained approval to export 2 million tonnes from its proposed BC LNG facility from 2014.

Given that final investment decisions have not been reached on any of these new US and Canadian liquefaction projects, their additional liquefaction capacity has not been taken into account in this medium term projection.

Australian gas production to more than double over the outlook period

In 2011–12, Australia’s gas production is forecast to increase by 5 per cent to 56 billion cubic metres. Increases in production are expected to be underpinned by the commissioning of a number of new fields. In December 2011, production from the Reindeer field in the Carnarvon Basin commenced. Production from the Xena and Pluto fields, which will supply the Pluto project, is expected to commence in the first half of 2012.

In 2012–13, the first stage of the Kipper/Tuna/Turrum project in the Gippsland Basin and the Macedon project in the Carnarvon Basin are scheduled for completion.

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These projects are expected to underpin an additional 13 per cent increase in Australian gas production in 2012–13 to total 63 billion cubic metres.

Over the remainder of the outlook period (2013–14 to 2016–17), Australia’s gas production is projected to increase at an average annual rate of 22 per cent, to reach 137 billion cubic metres by 2016–17. Increased gas production is projected to be facilitated by new LNG capacity as well as demand for gas from the electricity generation, industrial and residential sectors.

Australian LNG exports

Australian exports of LNG are forecast to decrease by 2 per cent in 2011–12 to total 20 million tonnes, reflecting planned maintenance at the North West Shelf LNG plant in the second half of 2011 and at the Darwin LNG plant in the second quarter of 2012. Lower production as a result of maintenance is forecast to offset new production from the commencement of operations at the Pluto facility in the first quarter of 2012. In 2012–13, Australian exports are forecast to increase by 19 per cent to total 23 million tonnes, as production at the Pluto facility is scaled up towards capacity.

Table 2: Existing and committed LNG projects over the outlook period

Project BasinCapacity (Mt a year) Trains

Expected start up

Existing projects

North West Shelf Carnarvon 16.3 5

Darwin LNG Bonaparte 3.6 1

Committed projects

Pluto train 1 Carnarvon 4.3 1 2012

QCLNG Surat-Bowen 8.5 2 2014

Gorgon Carnarvon 15 3 2014/15

Gladstone Surat-Bowen 7.8 2 2015

APLNG Surat-Bowen 9.0 a 2 2015

Wheatstone Carnarvon 8.9 2 2016

Prelude Browse 3.6 1 2016/17

Ichthys Browse 8.4 2 2016/17

a assuming a positive FID on the second train of APLNG in mid 2012.Source: BREE 2011, Mining Industry Major Projects, October 2011.

Over the remainder of the outlook period (2013–14 to 2016–17), Australian exports of LNG are projected to increase at an average rate of 31 per cent a year to reach 63 million tonnes in 2016–2017 (see Figure 4). Projected increases in export volumes are expected to be underpinned by the commissioning of several LNG projects that are currently under construction, as shown in Table 2.

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Figure 4: Australia’s LNG exports


Box 2: Developments in Australia’s eastern gas market

Australia’s two existing LNG projects are located on the north and western coast of Australia, linking Australia’s western domestic gas market to international LNG markets. As a result, domestic prices in Australia’s western market are close to parity with exports.

The lack of LNG terminals on the eastern coast of Australia, in conjunction with a number of domestic suppliers, has limited price increases in Australia’s eastern gas market. At present, domestic gas prices in the eastern market are well below prices in the Asia-Pacific LNG markets.

Three LNG projects using coal seam gas are under construction and are expected to start production in Queensland between 2014 and 2017. Once operational, these projects will connect Australia’s eastern gas market to the Asia-Pacific market, increase demand for domestically produced gas, and allow domestic prices to converge towards export parity over the longer term.

LNG prices under long-term contracts in the Asia-Pacific are generally linked to the price of oil. In 2011–12, higher forecast oil prices are expected to support higher LNG prices. Increasing LNG prices, combined with increasing export volumes, are forecast to underpin growth of 8 per cent in Australian LNG export earnings to total $12 billion in 2011–12

Over the medium term, real LNG prices in the Asia-Pacific region are projected to ease in line with lower projected oil prices, greater supply of LNG from North America and expanding liquefaction capacity in Australia. Nevertheless, between 2012–13 and 2016–17, Australia’s export earnings are projected to increase by an average of 22 per cent a year to total $30 billion (in 2011–12 dollars) in 2016–17. Increases in export earnings are projected to be underpinned by significant increases in Australian export volumes, which are expected to offset the effect of moderating LNG prices.

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Table 3: Gas outlook2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaProduction Gm3 50.1 53.1 55.9 63.3 69.3 84.2 119.6 137.1LNG export volume Mt 17.9 20.0 19.6 23.3 23.7 28.8 49.4 63.4

LNG export value– nominal A$m 7789 10437 11647 12808 13788 16552 27565 34550– real b A$m 8299 10786 11651 12458 13042 15225 24658 30055

b In 2011–12 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; Geoscience Australia.

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Thermal coal

Rubhen Jeya

Thermal coal prices are projected to decline gradually over the outlook period, but are nevertheless expected to remain relatively high in historical terms.

Over the outlook period, thermal coal imports are expected to be supported by growth in demand in the Asian region. Thermal coal imports will continue to be supported by new coal-fired power plants and government initiatives to increase electrification within a number of emerging economies. By 2017, world trade of thermal coal is projected to be 1040 million tonnes.

Mine and infrastructure capacity expansions in Australia, Indonesia, Colombia and South Africa will support an increase in thermal coal exports while the emergence of exports from Mozambique and Mongolia will also contribute to international trade over the outlook period.

Australia’s export volumes of thermal coal are projected to grow at an average annual rate of 11 per cent over the outlook period to total 269 million tonnes by 2016–17. Australia’s export values are projected to total $18.8 billion (in 2011–12 dollars) by the same year.

Thermal coal prices to remain elevated in the short term…

For much of 2011, thermal coal spot prices traded between US$115 and US$125 a tonne. Prices softened towards the final quarter of 2011 reflecting a slower demand growth in importing economies that coincided with increased exports from a number of key exporting countries. For 2011 as a whole, spot prices averaged around US$122 a tonne. In 2012, thermal coal spot prices are forecast to ease to around US$115 a tonne due to increased supply from Australia and Indonesia.

For Japanese Fiscal Year 2012-2013 (JFY, April 2012 to March 2013), thermal coal contract prices are assumed to settle at around US$115 a tonne. This would represent an 13 per cent lower price than the JFY 2011 contract prices which settled at around US$130 a tonne. The decrease in prices reflects a combination of factors including lower growth in import demand in several major importing economies and an increase in exports from large exporters such as Australia and Indonesia.

…but declining over the medium term although still remaining high in historical terms

Over JFY 2013 to JFY 2017, thermal coal contract prices are assumed to gradually decline, reaching US$82 a tonne (in 2012 dollars), by JFY 2017. Despite the decline, thermal coal prices are projected to remain above historical averages (see Figure 1). The decrease in prices reflects strong growth in exports from Australia, Indonesia and Colombia and emerging exporters such as Mongolia and Mozambique.

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The projected decrease in prices is expected to be limited by production costs, which have increased significantly over the past decade. Production costs are expected to continue to increase as companies extract coal deposits that are deeper underground and further away from existing infrastructure. In addition, the costs of many inputs such as diesel, labour, explosives and machinery are also expected to increase. Higher unit costs also reflect the increased capital costs associated with project construction.

Figure 1: JFY thermal coal prices


World imports to grow rapidly…

Over the outlook period world thermal coal imports are projected to increase at an average rate of 4 per cent a year to reach 1040 million tonnes by 2017. The majority of growth is projected to occur in Asia, underpinned by strong import growth in non-OECD Asia, particularly China and India (see Figure 2). As economies in emerging Asia grow and per capita income increases, a significant proportion of increased electricity demand is expected to be supplied by coal-fired power stations. This is because coal remains a cheap form of energy for base load electricity generation and is geographically widely available.

Gas, nuclear and renewable electricity generation is expected to increase throughout non-OECD Asia, however, it will still only account for a relatively small share of the total electricity generation in 2017. By contrast, thermal coal imports into OECD markets such as Japan and Europe are projected to remain relatively flat, due to relatively limited growth in electricity demand associated with assumed weaker economic growth over the short term and increases in energy efficiency over the outlook period. In the OECD, the share of electricity generated from coal is expected to decrease as government policies encourage the use of gas and renewable energy.

Figure 2: Major thermal coal importers


…underpinned by China…

In 2011, China’s thermal coal imports are estimated to have totalled 139 million tonnes, an increase of 8 per cent from 2010. The strong growth witnessed in China’s imports since 2009 reflects an inability of China’s domestic coal producers to meet increased domestic demand. It also reflects the competitiveness of imported coal, as domestic transportation and mining costs are high.

In 2012, China’s thermal coal imports are forecast to increase by 4 per cent to 145 million tonnes. The lower rate of growth in imports relative to 2011 reflects lower

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growth in electricity generation associated with assumed weaker economic growth and a decision to cap domestic coal prices, which should make domestic coal more competitive relative to imports. However, thermal coal imports are still forecast to increase given continued constraints on China’s domestic coal infrastructure that will limit the quantity of coal that can be moved from the north and west of the country to the major consuming regions in the east.

Over the medium term, China’s thermal coal imports are projected to continue increasing in line with trends seen over the past three years. The increase in imports reflects projected strong growth in domestic demand that will outpace growth in domestic production. Robust growth in China’s coal consumption will be underpinned by increases in electricity demand associated with rapid economic growth. A significant proportion of increased electricity generation is expected to come from coal-fired plants, with increased generation from gas, nuclear and renewable energy sources making up the difference.

While China is the world’s largest coal producer and its production will increase over the medium term, increases in domestic supply are expected to be limited by high mining and transportation costs. Increases in mining costs are associated with new coal deposits that are at greater distances from existing infrastructure and further below the surface than previously mined deposits. An increased focus on the environment and safety is also expected place upward pressure on mining costs due to compliance.

Transport costs are expected to increase as mining movies further into China’s western provinces, which are further away from large consuming centres on the southeast coast. As a result coal imported into China’s south eastern coastal region will continue to be competitive against coal transported from China’s northern and western production regions. Accordingly, China’s thermal coal imports are projected to increase at an annual average growth rate of 3 per cent to reach 166 million tonnes by 2017.

China’s coal exports have declined rapidly from around 81 million tonnes in 2004 to an estimated 13 million tonnes in 2011. The fall in exports reflects strong domestic demand and policies aimed at ensuring sufficient supply for domestic consumers. Over the outlook period, China’s exports are projected to decline gradually to total 11 million tonnes by 2017, reflecting strong domestic demand and weaker import demand in north Asia.

…and strong growth in India

India is expected to remain one of the fastest growing consumers and importers of thermal coal over the outlook period. Imports are projected to increase at an annual average rate of 11 per cent, growing from around 78 million tonnes in 2011 to reach 148 million tonnes in 2017. India will continue to rely heavily on thermal coal imports from Indonesia over the outlook period, with further support in imports from South Africa and Australia. Like China, India’s growth in thermal coal imports

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reflects strong growth in domestic consumption which is not expected to be matched by increases in domestic production.

A rise in India’s thermal coal consumption is expected to be underpinned by the planned expansion of coal-fired electricity generation capacity to support rising electricity demand. The Ministry of Power identified gaps in electricity supply and outlined a plan for higher rates of electrification across India. This has resulted in the planning and construction of a number of power stations which are scheduled to start up over the outlook period.

One of the initiatives was to increase the amount of electricity generated from both private power stations and government funded Ultra Mega Power Projects (UMPPs)—power stations with a generation capacity of 4000 megawatts. There are four UMMPs either under construction or in the final stages of planning (see Table 1) and together these power stations could burn up to 16 million tonnes a year of coal. In addition, there are a number of smaller coal-fired power stations under construction that will contribute to India’s growth in thermal coal consumption.

Table 1: India’s recently awarded UMPPsProject State Owner StatusSasan UMPP Madhya Pradesh Reliance Under Construction

Krishnapatnam UMPP Andhra Pradesh Reliance Under Construction

Tilaiya UMPP Jharkhand Reliance Under Development

Mundra UMPP Gujarat Tata PowerCommenced operation of first of five units (800 mega watts)

Sources: Company reports; Government of India.

The expected increase in India’s thermal coal imports is, in part, due to a number of new power stations that will rely on imported coal. While India is the world is third largest producer of coal, growth in production over the outlook period is not expected to be sufficient to meet consumption increases. There is uncertainty about the rate at which India’s coal production will increase given the lengthy approval process for the development of new mines. Many of the delays relate to getting environmental approvals and negotiating agreements with local land holders. Further, much of India’s coal reserves are of a poor quality, with low calorific values and high sulphur contents. Imported coal is often used to blend with domestically produced coal to increase the energy output of coal consumption and to improve the quality of emissions. In addition, a number of the power stations are located in India’s heavily populated regions and distant from coal mines, which are mostly located in the centre of the country. Inefficient transport networks can make it costly, and possibly uneconomic, to move coal around the country. This, in turn, tends to make imports more attractive to coal consumers.

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Limited potential for growth in Japan, the Republic of Korea and the European Union

The March 2011 earthquakes and tsunami of the east coast of Japan had a significant impact on the power generation mix and generation capacity within Japan. These effects could last for the duration of the outlook period. In addition to nuclear power facilities, a number of coal-fired power stations were damaged by the earthquakes and tsunami. The immediate shutdown of some coal fired electricity generation resulted in Japan’s thermal coal imports in 2011 decreasing by an estimated 3 per cent relative to 2010 to 125 million tonnes. In 2012, Japan’s thermal coal imports are forecast to increase by 2 per cent to 128 million tonnes under the assumption that a restart of some of the damaged thermal power stations will result in increased imports. Increased economic activity associated with the reconstruction of damaged regions is also expected to support thermal coal imports in 2012.

In 2013 and over the remainder of the outlook period, Japan’s thermal coal imports are forecast to remain more or less unchanged at around 129 million tonnes. At this level of imports, Japan’s coal-fired electricity generation would be operating at or near full capacity. Accordingly, any increases in thermal coal imports beyond 129 million tonnes would be dependant on expansions to coal-fired electricity generation capacity. The outlook for Japan’s thermal coal imports is based on the assumption that there will be no significant such additions over the outlook period. There is a possibility that an upcoming review of Japan’s energy sector may encourage the construction of new coal-fired capacity, particularly if it is recommended nuclear capacity is shut down for an extended period. If this happened, Japan’s thermal coal imports could increase beyond 129 million tonnes the outlook period.

In 2011, the Republic of Korea’s thermal coal imports increased by 7 per cent, relative to 2010, to 97 million tonnes as growth in electricity demand was met by increased output from recently commissioned and existing coal-fired power stations. In 2012 and 2013, thermal coal imports are forecast to increase by 3 per cent and 2 per cent, respectively, to reach 102 million tonnes in 2013. Over the remainder of the outlook period (2014 to 2017), at least 2000 megawatts of new coal-fired electricity generation capacity is scheduled to be commissioned. The new capacity is expected to support thermal coal imports that are projected to increase at an annual average growth rate of 2 per cent between 2014 and 2017 to reach 112 million tonnes.

In 2011, European Union (EU) coal imports are estimated to have increased by 7 per cent, relative to 2010, to 160 million tonnes. The increase in imports was underpinned by increased imports to the UK, where thermal coal imports grew by around 50 per cent from the previous year to around 30 million tonnes, primarily because of disruptions to gas supplies from the North Sea and a rebuilding of coal stocks. In Germany, thermal coal imports increased from 2010 to total around 39 million tonnes, underpinned by higher electricity usage. In 2012, thermal coal imports are forecast to decrease by 3 per cent from 2011 to 156 million tonnes as weak economic growth across the region and the availability of gas for electricity

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generation limit growth in coal-fired electricity generation and, hence, thermal coal imports.

Over the years 2013 to 2017, thermal coal imports into the EU are projected to increase at an annual growth rate of 2 per cent to total 168 million tonnes by 2017. Growth in coal imports into Germany is expected to offset lower imports into Southern European economies. In Germany, there has been a shift in its energy generation mix which has seen older nuclear power facilities shut down and legislation enacted to shut all nuclear facilities by 2022. The loss of nuclear power generation is expected to be replaced by a combination of new coal-fired power plants and renewable energy. In other parts of Europe, such as Spain, Portugal and Italy, projected lower coal consumption and imports are due to assumed weak economic growth over the outlook period and the increasing share of renewable energy in their electricity generation mix.

Over the next 8 years Germany could gradually add net coal-fired generation capacity of around 10000 megawatts. This net figure incorporates the closure of a number ageing power plants. New coal-fired power generation is expected to support imports, particularly given the decline of Germany’s domestic coal production. The German Government has announced a target to close all of its hard coal production by 2018. If this eventuates all of Germany’s black coal consumption will need to be sourced from imports.

Global supply to increase over the medium term

Over the outlook period growth in the world thermal coal trade is projected to be supported by higher exports from Australia, Indonesia, Colombia and South Africa (see Figure 3). Mine, port and rail expansion plans are well underway in these countries to support an increase in exports.

Figure 3: Major thermal coal exporters


Australia’s exports to increase

In 2011, Australia’s thermal coal exports increased by 4 per cent, compared with 2010, to total 148 million tonnes. This increase was supported by recently completed projects such as Xstrata’s Mangoola mine (annual capacity of 8 million tonnes), stage 1 of Yancoal’s Moolarben mine (8 million tonnes), and the expansion of the BHP Billiton’s Mount Arthur North open-cut mine (additional 3.5 million tonnes).

In 2012, Australia’s coal exports are forecast to increase by 10 per cent to 162 million tonnes. Underpinning this growth will be projects scheduled for completion in 2012, including Rio Tinto and Mitsubishi’s Hunter Valley Operations Expansion, Xstrata’s Ravensworth North and Narrabri Coal Project (stage 2). Increased mine production capacity will also be supported by recently completed infrastructure projects,

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including Port Waratah Coal Services’ Kooragang Island Coal Terminal expansion (11 million tonnes a year), the X50 expansion at Abbot Point (additional 25 million tonnes). Supporting these infrastructure expansions is higher throughput at the Newcastle Coal Infrastructure Group Coal Terminal.

Between 2013 and 2017, Australia’s thermal coal exports are projected to grow at an average annual rate of 11 per cent to total 269 million tonnes by 2017. Encouraged by sustained high prices and strong demand, a number of mining companies are scheduled to commission new projects over the latter years of the outlook period. The majority of these projects will be in New South Wales. For example, Xstrata’s Ulan West (annual capacity of 7 million tonnes), BHP Billiton’s Mount Arthur (4 million tonnes a year run-of-mine) and Idemitsu Kosan’s Boggabri open-cut mine (3.3 million tonnes) are all scheduled to commence production by 2014. In addition, it is assumed that expansions to the Ensham Resources’ underground mine in Queensland will contribute to increased production and exports over the medium term.

Additional mine production will be supported by expansions to infrastructure capacity. Capacity at Newcastle Coal Infrastructure Group Coal Terminal is scheduled to increase through the addition of stage 2 (additional capacity of 23 million tonnes a) and stage 3 (additional 13 million tonnes) that will commence in 2013 and 2014. A number of rail projects in the Hunter Valley that are either under construction or at an advanced stage of planning will complement increased mine and port capacity. In Queensland, a number of port and rail projects are likely to start operation within the outlook period which will also increase export capacity. These include stage 1 of the Wiggins Island Coal Terminal and the associated rail project, and expansions at Abbot Point and the Goonyella to Abbot Point rail expansion and the Surat Basin Rail project.

The Galilee Basin, located in Queensland, contains vast deposits of thermal coal. While a number of mining projects in the Basin are progressing towards a final investment decision, there are a number of challenges to project development and operation. These include the design of port and rail infrastructure and negotiations and possible agreements with other project owners on infrastructure access. Before a final investment decision can be taken, off-take agreements with customers may need to be finalised as well as securing funding for the multi-billion dollar development costs. While the Galilee Basin is expected to become an important coal producing region, significant exports from this region are not expected to occur until after 2017.

Indonesia’s exports to increase despite growing domestic demand

In 2011, Indonesia’s thermal coal exports are estimated to have increased by 6 per cent, relative to 2010, to total 302 million tonnes. The increase in exports reflects strong demand from China and India and favourable weather conditions in the second-half of 2011 which supported higher rates of production and exports. Indonesia’s thermal coal exports in 2012 are forecast to increase by a further 3 per cent to 310 million tonnes, underpinned by continued growth in exports to China

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and India and additional expansions to domestic production and infrastructure capacity.

Over the medium term, Indonesia’s thermal coal exports are projected to continue increasing despite expected growth in domestic coal consumption. Indonesia continues to have frequent electricity shortages and in response, Indonesia’s state run power generator Perusahaan Listrik Negara (PLN) plans to increase its coal fired generation capacity. PLN’s target is to add an additional 10 Gigawatts of electricity generation capacity by 2014, with a large portion to be from coal-fired power stations. To ensure these and other power stations have adequate access to coal, Indonesia has legislation in place that requires domestic coal producers to sell up to 25 per cent of their production to domestic consumers. However, despite the increase in demand from domestic consumers, Indonesia’s coal production is projected to increase in order to supply both domestic and export markets.

Growth in production and export capacity will be supported by expansions at a number of Indonesia’s largest companies, including at Kaltim Prima Coal and Arutmin where combined capacity is expected to reach 100 million tonnes by 2013. Expansions to relatively smaller mines including the Fajar Bumi Sakti (FBS) and the Pendopo mines are also expected to contribute to an increase in Indonesia’s production and exports.

In addition to mine capacity expansions, Indonesia’s largest coal miners are also investing in infrastructure and process improvements to boost their exports. For example, PT Adaro has invested in additional barge loaders at South Kelanis located near the Kelanis River Terminal, through which about 50 million tonnes of coal are transported. The additional barges are expected to improve efficiency, lower costs and also support PT Adaro’s expansion plans to increase production to 80 million tonnes a year.

Reflecting these developments, Indonesia’s coal exports are projected to increase at an average annual rate of 3 per cent a year from 2013 to reach 351 million tonnes by 2017.

Colombian and South African exports to increase

In 2011, Colombia’s thermal coal exports are estimated to have increased by 9 per cent, relative to 2010, to total 75 million tonnes. The rise in exports largely reflects a significant increase in exports into Asia which was facilitated by low freight rates throughout 2011. In 2012 and 2013, Colombia’s thermal coal exports are forecast to increase, underpinned by capacity expansions at the La Guajira and César mining regions.

Beyond 2013, Colombia’s thermal coal exports are projected to increase at an average annual rate of 5 per cent to total 97 million tonnes by 2017. The increase in exports will be supported by planned investment to expand production at the Cerrejon mine and also at the César coal region from producers such as Drummond, Glencore and Vale. The scheduled expansions to infrastructure, including a second

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berth at Puerto Bolivar by 2015, would support an increase in Colombia’s exports. Much of the growth in Colombia’s coal exports will need to be sold into Asia given the projected weak import demand growth in its traditional export markets of Europe and the US. Support for increased Colombian coal exports to Asia is supported by its desirable characteristics such as high calorific values and low sulphur content. A drive to diversify supply by some Asian countries will also support Colombia’s coal exports as will current relatively low freight rates.

South Africa’s thermal coal exports in 2011 were estimated to be around 66 million tonnes, a decrease of 3 per cent from 2010. The decline in exports was partly attributable to limitations in infrastructure to support exports, and weather related disruptions in the first-half of 2011. In 2012 and 2013, thermal coal exports from South Africa are expected to increase by 3 per cent and 4 per cent each year to total 71 million tonnes in 2013. The growth in exports will be supported by gradual improvements to the efficiency of the infrastructure network, including increased capacity of the rail line to the Richards Bay Coal Terminal.

Over 2014 to 2017, South Africa’s exports are projected to increase by around 3 per cent a year, reaching 81 million tonnes by 2017. The growth will be supported by an increase in production at Xstrata’s and Anglo American’s operations. However, there are a number of challenges to increasing exports for South African producers including energy supply disruptions at mine sites and infrastructure bottlenecks, particularly along the Richards Bay Coal Terminal rail line. In addition, increasing domestic demand could limit the availability of coal for export.

Exports from the US to decline in 2012

In 2011, thermal coal exports from the US increased by 36 per cent from 2010 to total 31 million tonnes. The rise in exports was underpinned by increased import demand from Europe and Asia. Additionally, weak domestic demand in the US freed up coal to be sold into export markets.

In 2012, US thermal coal exports are forecast to decrease by 11 per cent, relative to 2011, to total 28 million tonnes, reflecting weaker demand from its largest market, Western Europe.

Over the remainder of the outlook period (2013 to 2017), US exports are projected to increase to around 33 million tonnes a year. Exports from the US are supported by weak domestic demand for thermal coal associated with low domestic gas prices and an associated increase in use of gas fired electricity generation. There are also plans to upgrade export infrastructure on the eastern and Gulf Coasts to enable production that was previously destined for domestic markets to be exported. There are further upside risks to US exports, with preliminary plans in place to export coal from the north west of the country to importers in the Asia-Pacific region. Low cost and low energy content coal would be sourced from the Powder River Basin in Wyoming and exported via ports located either in Washington or Oregon. While there are marketing, environmental and social challenges associated with the plans,

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it is possible that coal could be exported from the north west of the US within the outlook period, which could boost US exports beyond 30 million tonnes a year.

Exports from Mozambique and Mongolia to contribute to international trade

Mozambique is a relatively new contributor to thermal coal trade and exported its first significant shipment in 2011. Mozambique’s exports are expected to increase gradually over the short term before growing strongly in the second half of the outlook period. Mozambique’s exports are supported by the Moatize coal project which is owned and operated by Vale. Production and exports from Moatize are expected to ramp up to about 3 million tonnes of thermal coal by 2015. There are a number of other projects that are either under construction, such as the Benga project, or in the planning stage that will also support export growth over the second half of the outlook period. To support higher exports, expansions to port and rail infrastructure is being proposed in the north and south of the country.

Mongolia is another relatively new thermal coal exporter, but has significantly increased its production and exports over the past few years. Most of Mongolia’s coal is exported to China, initially by truck to the Chinese boarder before being loaded onto China’s rail network bound for power generators in northern China. In 2010, Mongolia exported around 6 million tonnes of thermal coal compared with 0.2 million tonnes 5 years earlier. Given the expected growth in demand from China, Mongolia’s thermal coal exports are expected to continue growing, underpinned by new mine developments. However, significant growth in Mongolia’s exports over the medium term is dependant on the construction and connection of rail infrastructure from coal fields to the Chinese boarder, and beyond to Chinese power stations.

Australian export volumes and values to increase

Expansions at a number of mines and increased investment in infrastructure development will continue to support export volumes and earnings. In 2011–12, thermal coal export volumes are forecast to increase by 13 per cent, to 162 million tonnes. Due to increased export volumes, Australia’s thermal coal export values are forecast to increase by 24 per cent to $17.9 billion in 2011–12 (see Figure 4).

Over the remainder of the outlook period (2012–13 to 2016–17), Australia’s thermal coal export volumes are projected to reach 268 million tonnes by 2016–17, with export earnings reaching $18.8 billion (in 2011–12 dollars).

Figure 4: Australia’s thermal coal exports


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Table 2: Thermal coal outlook2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

WorldContract prices b– nominal US$/t 98 130 115 110 102 97 93 90– real c US$/t 102 130 112 105 97 91 86 82

Coal trade Mt 794 836 872 922 949 982 1010 1040

ImportsAsia Mt 532 569 603 637 661 687 712 737– China Mt 129 139 145 151 155 159 163 166– Chinese Taipei Mt 65 67 68 69 71 73 74 75– India Mt 60 78 92 110 119 128 138 148– Japan Mt 129 125 128 129 129 129 129 129– Republic of Korea Mt 91 97 100 102 105 107 109 112– Malaysia Mt 19 20 21 22 22 23 24 26– other Asia Mt 40 43 49 55 61 69 75 81Europe Mt 192 203 201 206 208 213 214 218– European Union d Mt 149 160 156 159 160 164 166 168– other Europe Mt 43 43 45 48 48 49 49 50Other Mt 70 64 68 79 80 82 84 86

ExportsAustralia Mt 141 148 162 192 220 236 264 269China Mt 20 13 13 12 12 12 11 11Colombia Mt 69 75 76 82 86 90 94 97Indonesia Mt 285 302 310 321 327 337 344 351Russian Federation Mt 95 97 99 99 102 105 106 107South Africa Mt 68 66 68 71 74 76 79 81United States Mt 23 31 28 29 31 32 33 33Other Mt 93 104 116 116 97 94 80 91

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaProduction Mt 198.3 206.1 224.8 238.2 271.6 290.2 319.0 332.9ExportsVolume Mt 135.0 143.3 162.2 173.1 206.6 225.2 254.0 267.9Value– nominal A$m 11886 13956 17845 17641 19943 20390 21635 21604– real e A$m 12665 14423 17851 17158 18863 18755 19353 18793

b Japanese Fiscal Year, starting April 1, fob Australia basis, BREE Australia–Japan average contract price assessment. For steaming coal with a calorific value of 6700 kcal/kg (gross air dried. c In JFY 2011 US dollars. d Regarded as 27 countries for all years. e In 2011–12 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; IEA; Coal Services Pty Ltd; Queensland Department of Mines and Energy.

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Uranium

John Barber

In the short term, the uranium price is forecast to stabilise with lower planned production in Kazakhstan and continued demand growth in developing economies expected to offset lower consumption from reactor closures in Japan and Germany.

The future of the Japanese nuclear energy industry remains uncertain. It is expected that some nuclear reactors will restart this year; however policy changes that promote decreased reliance on nuclear power in the medium to long term may affect growth in Japan’s uranium consumption.

Over the outlook period, strong consumption growth from a large number of new reactors starting up, particularly in China, India and the Russian Federation, and reduced supplies from secondary sources are projected to lead to a price increase.

Increased production from new mining projects and higher export prices are projected to lead to strong growth in Australia’s uranium exports over the outlook period.

Uranium prices to remain constant in 2012

The uranium spot price averaged around US$57 a pound for 2011, an increase of 20 per cent from 2010, although the monthly average price varied considerably over the year (see Figure 1). In 2011, the spot price peaked at US$73 a pound in January before dropping by 30 per cent to a low of US$49 a pound in August in response to the reactor closures in Japan and Germany that followed the Fukushima reactor accident in March. However, with demand remaining high in other countries, particularly from the start up of new reactors in China, India, and the Republic of Korea, the uranium price stabilised in the second half of 2011, averaging around US$52 a pound.

The uranium price is forecast to average around US$53 a pound in 2012, a decrease of 7 per cent relative to the 2011 average price but at a similar level to prices in the second half of 2011. The relatively small change in prices in 2012, compared with 2011, reflects the impact of lower demand arising from the closure of Japanese reactors closures being largely offset by planned lower production in Kazakhstan. Developments in Japanese energy policy, particularly the timing of nuclear reactor restarts in the wake of the Fukushima reactor disaster, and global economic uncertainty are likely to influence uranium price movements in 2012.

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Figure 1: Quarterly uranium price


Uranium prices to increase over the medium term

Between 2013 and 2017, uranium prices are projected to increase, as growth in consumption is projected to exceed growth in production. World uranium consumption is projected to increase, supported by the scheduled start up of a large number of reactors, particularly in emerging economies such as China and India, and continued robust consumption in the US and France.

From 2013 onwards it is assumed there will be a decrease in uranium supplies from secondary sources following the completion of the US-Russian Federation Highly Enriched Uranium (HEU) feed deal which over the past few years has supplied around 8000 tonnes of uranium a year to the market. Mine production, however, is not projected to increase at a rate that can offset lower secondary supplies. As a result uranium prices are projected to increase.

By 2017 the uranium price is projected to reach around US$69 a pound (in 2012 dollars), representing an average annual increase of 3 per cent in real terms over the outlook period. This projection is based on the assumption that emerging countries, such as China and India, do not significantly lower their rate of building new nuclear reactors. Delays to the scheduled start up of new mines, which is common with uranium mining, represents an upside risk to the uranium price projection.

Uranium consumption to grow strongly

Generation of nuclear power remains the main commercial use for uranium. Uranium consumption is highest when a new nuclear reactor starts operating, which typically requires around 600 tonnes of uranium for the initial core (based on a 1 Gigawatt electric light-water reactor). Once a reactor reaches a steady-state level of operation uranium requirements are lower, with refuelling taking place every one to two years that involves the replacement of only a portion of the nuclear fuel.

As of February 2012, there were 386 nuclear power plants operating around the world with a total generating capacity of approximately 330 Gigawatts electric. In addition, there are currently 49 Japanese nuclear reactors temporarily closed for safety inspections following the Fukushima reactor accident, although many of these may be expected to restart over the next two years. The US and France are the two largest producers of nuclear energy, with 104 reactors in the US and 58 in France producing 102 and 63 Gigawatts electric respectively.

In 2012, world uranium consumption is forecast to increase by 5 per cent to around 77300 tonnes. This growth will be underpinned by the start up of eight new reactors including two in both China and India. In addition, there are three reactors in Canada scheduled to restart and it is assumed that some of the nuclear power stations in Japan which are currently offline for safety inspections, will be restarted by the

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second half of 2012. Offsetting these factors will be lower demand associated with a number of reactors that shutdown in Germany and Japan in the second half of 2011.

Over the remainder of the outlook period (2013 to 2017), growth in uranium consumption is projected to average 7 per cent a year, reaching approximately 110000 tonnes by 2017. The start up of new nuclear reactors, particularly in China, India and the Russian Federation, is expected to greatly exceed the reduced consumption from reactors closing in the UK, Germany and Canada. Between 2012 and 2017, around 100 new nuclear reactors are scheduled to commence operating, with almost half of these located in China (see Table 1).

Table 1: Projected new capacity over the outlook periodCountry New reactors New capacity (GWe)Argentina 1 690Brazil 1 1340Bulgaria 2 2100Canada 3 2160China 44 50500Chinese Taipei 2 2600Finland 1 1600France 2 3500India 10 8400Japan 1 1400Pakistan 2 680Romania 2 1440Republic of Korea 6 7400Russian Federation 16 16400Slovakia 2 880Ukraine 2 2000US 4 8000Total 103 111145

Source: World Nuclear Association.

Growth in the US nuclear energy industry has stagnated since the 1979 Three Mile Island reactor meltdown, with safety concerns and cheap gas prices leading to an increase in gas turbine power generation. In February 2012, the US Nuclear Regulatory Commission (NRC) gave approval for the construction of the first new nuclear power plant in the US in over 30 years. With around 20 Combined License Applications for new reactors also currently under review by the NRC, generation of nuclear energy in the US may start to increase after the outlook period.

Future of the Japanese nuclear industry

At the start of 2011 Japan was the world’s third largest consumer of uranium and had an energy policy that promoted the increased use of nuclear energy. The future of the Japanese nuclear power industry is now uncertain after a 15m tsunami critically damaged the Fukushima Daiichi power plant leading to radiation leaks. Flooding from the tsunami caused a disruption to back up power supplies and cooling systems, with subsequent overheating leading to a core meltdown in three

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reactors and hydrogen explosions that damaged a fourth. These reactors have now been permanently closed with initial plans, based on the decommissioning of the Three Mile Island nuclear power plant, that indicate it may take up to 40 years to fully dismantle the damaged reactors and buildings.

In response to the accident, and growing public anti-nuclear sentiment, the Japanese Government has mandated all remaining reactors to close for a comprehensive safety assessment. Japan’s Energy Basic Plan, which previously promoted increasing nuclear energy to around 50 per cent of all energy consumption to reduce carbon emissions, is now being revised in response to government policy changes announced in the new Energy White Paper.

As of February 2012, only two of Japan’s 51 nuclear power plants remain operational, with plans to close these for inspection in early 2012. Fourteen power plants have undergone stress tests as part of the safety assessment, but still require approval from local authorities in order to restart. Given increasing public opposition towards nuclear energy in parts of Japan it is unclear when the reactors will restart, however, with almost 30 per cent of Japan’s energy previously coming from nuclear power it is assumed in this outlook that in the short to medium term Japan will need to return to nuclear energy.

Japan’s uranium consumption in 2012 is forecast to remain low at around 3300 tonnes based on the assumption that around 15 reactors restart. The restart of Japanese reactors is unlikely to require a significant amount of additional uranium in 2012, with existing inventories from offline reactors more likely to be used.

In the medium term, Japan’s consumption of uranium will depend on decisions to continue with previous plans to build additional nuclear reactors. Prior to policy changes away from nuclear energy, Japan had two reactors under construction with plans to build another two by 2017. Assuming that the two planned reactors no longer go ahead due to the policy change, uranium consumption is projected to decrease from a 2010 pre-Fukushima accident consumption level at an annual average rate of 1 per cent to around 8600 tonnes by 2017. Decreased nuclear energy production due to Government policy may result in even lower consumption if additional nuclear power plants are closed in the outlook period.

Growth in China’s uranium consumption…

The main contributor to growth in world uranium consumption over the medium term will be China. China’s consumption is projected to more than triple between 2011 and 2017 to around 15500 tonnes, supported by an increase in the number of reactors from 15 in 2011 to around 60 in 2017.

In December 2011 the Chinese Government re-affirmed its commitment to increase nuclear energy over the medium and long term. China’s energy policy is supportive of nuclear power because it can provide large quantities of base load electricity generation capacity with lower greenhouse gas emissions than other fuel sources,

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and also provides for diversification in its energy sources for energy security purposes.

…and in the rest of Asia…

In Asia (including India, but not Japan and China) uranium consumption in 2012 is forecast to increase by 32 per cent to 10 200 tonnes, supported by five new reactors that are expected to commence operation. This includes two in each of India and Chinese Taipei and one in the Republic of Korea.

Over the outlook period, consumption in Asia is projected to increase to around 13 200 tonnes at an average rate of 9 per cent a year. Between 2012 and 2017, a total of 20 new reactors are scheduled to commence operation, including 10 new reactors in India and six in the Republic of Korea.

…and also Europe over the medium term

A number of European countries are reviewing their use of nuclear energy in response to the Fukushima reactor incident. Germany has already committed to permanently closing eight nuclear reactors. In 2012, European uranium consumption, including the Russian Federation and the Ukraine, is forecast to remain at around 32000 tonnes. Reactor closures in the UK and Hungary are likely to be offset by the start up of two reactors in the Russian Federation and one in Slovakia.

Over the medium term, European uranium consumption is projected to grow at an average annual rate of 3 per cent to total around 39000 tonnes by 2017. The opening of new of reactors in the Russian Federation, France and some Eastern European countries, including the Ukraine, Romania, Bulgaria and Slovakia should result in consumption growing faster in the second half of the outlook period relative to the 2012 to 2015.

Secondary uranium supplies to decline over the outlook period

Uranium supply can be divided into two categories: primary mine production and secondary sources. Between the late 1950s and 1989, uranium mine production was used extensively for military purposes and consistently exceeded requirements for electricity generation. However, since 1990 this trend has changed and uranium requirements for energy generation now exceed mine production.

This shortfall has been met from secondary sources of uranium which include spent nuclear fuel, down blended HEU used in nuclear weapons and mixed oxide fuels. The proportion of uranium supplied from secondary sources peaked at nearly 50 per cent in 1999 but has declined sharply in recent years with increased mine production meeting the growth in demand.

In 2011, secondary sources supplied around 17000 tonnes of uranium and accounted for approximately 23 per cent of the market. The largest source of secondary supplies was the US-Russian Federation HEU purchase agreement, which provided

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around 8000 tonnes. This purchase agreement ends in 2013 and secondary supplies are projected to decline to less than 9000 tonnes after 2014.

The medium term outlook assumes that the US-Russian Federation HEU purchase agreement is not renewed. In the event that a new agreement is signed, secondary supplies would be higher than projected and likely to lead to a lower uranium price.

Mine production to increase…

In 2011, world uranium mine production increased by 2 per cent to around 56600 tonnes with increases in Kazakhstan offsetting lower output in Canada. For 2012, production is forecast to increase by 3 per cent to approximately 58 200 tonnes as a result of higher Australian and African mine output.

Over the outlook period, world uranium production is projected to increase at an average annual rate of 7 per cent to around 87000 tonnes in 2017. The production increase is projected to be supported by new mine developments and expansions in Kazakhstan, Africa, Canada and Australia that are in the ramp up phase of production or are already under construction.

…supported by Kazakhstan, Africa and Canada

Kazakhstan remained the world’s largest producer of uranium in 2011 with the 19500 tonnes produced by its 15 mines accounting for around one third of global production. In 2012, production is forecast to remain constant following announcements in late 2011 that production would be stabilised in order to manage declining prices, and that no new projects would be developed while prices remain at current levels.

Over the outlook period it is assumed that increased demand and higher uranium prices will lead mines in Kazakhstan to increase their production levels. The medium term projection is for output from existing mines to reach around 25000 tonnes by 2017, with no new mines expected to start in this time due to the long start up time associated with uranium mining.

In 2011 uranium production in Africa fell by 2 per cent as a result of lower grades and extraction rates at Rio Tinto’s Rössing mine in Namibia. For 2012, production is forecast to recover, increasing by 4 per cent to 10 700 tonnes with increased production coming from Paladin Energy’s Langer Heinrich in Namibia and recently started SOMINA’s Azelik mine in Niger.

Over the medium term, uranium production in Africa is projected to grow at an average rate of 7 per cent a year to around 19000 tonnes in 2017. This growth is expected to be underpinned by the start up of new mines, including AREVA’s Imouraren mine (annual capacity of 2000 tonnes U3O8) in Niger, Extract Resources’ Rössing South (annual capacity of 2300 tonnes U3O8) Trekkopje (1900 tonnes U3O8) in Namibia and Simmer’s Buffelsfontein (annual capacity of 230 tonnes U3O8) in South Africa. An extension to the Rössing mine in Namibia is also expected to increase output by 600 tonnes a year from 2012.

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Canada’s uranium production is forecast to remain steady in 2012 after the closure of the 1500 tonne capacity McClean Lake mine resulted in a 12 per cent decrease in production in 2011. Over 2012 to 2017, production is projected to increase at an average rate of 11 per cent a year to reach 16 700 tonnes by 2017. The start up of Cameco’s 4000 tonne a year Cigar Lake mine in 2013 is expected to underpin this growth. Production at the Cigar Lake mine has been delayed several times by flooding, but it is expected to become the world’s second largest uranium mine by 2017. Uranium production in Canada will be further boosted by an expansion at Cameco’s McArthur River mine in 2016 that will increase production by around 1000 tonnes a year.

Start up of new mines to boost Australia’s uranium production

Australia’s uranium mine production in 2011–12 is forecast to remain constant at around 7100 tonnes. As in 2010-11, production at ERA’s Ranger mine was affected by heavy rainfall in December 2011 and normal operation is not expected to resume until the second half of 2012. Uranium One’s Honeymoon mine in South Australia commenced production in 2011, however, output is forecast to remain low for the remainder of the 2011–12 financial year.

Out to 2016–17, Australia’s uranium mine production is projected to increase at an average rate of 12 per cent a year to 13 500 tonnes in 2016–17. The increase in production is based on the assumption that a number of new mines commence operation within the outlook period. Mines scheduled to start up within the medium term include Toro Energy’s Wiluna operation (annual capacity of 800 tonnes U3O8), Energy and Metals Australia’s Mulga Rocks operation (1200 tonnes U3O8), Mega Uranium’s Lake Maitland mine (1000 tonnes U3O8) and BHP Billiton’s Yeelirrie operation (3500 tonnes U3O8) in Western Australia, and Energy Metals’ Bigrlyi mine (600 tonnes U3O8) in the Northern Territory. Plans to expand production at BHP Billiton’s Olympic Dam mine in South Australian are not included in this projection as the expansion is not expected to be completed within the outlook period.

A number of the above projects are yet to receive company or government approvals and are undergoing feasibility and/or environmental studies. As a result, there is some uncertainty around project capacities and schedules that could result in actual production deviating from projections.

Australia’s uranium exports to increase

In 2011–12, the volume of Australia’s uranium exports is forecast to increase by 2 per cent to 7100 tonnes with high wet-season rainfall in the Northern Territory again affecting production at the Ranger mine. The value of Australian exports is forecast to increase by 12 per cent to around $708 million in 2011–12 as a result of higher average contract prices being negotiated by Australian suppliers. This forecast assumes production at Ranger can restart before June 2012; delays to this are likely to result in a lower export volume and value.

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In Australia, the average long-term contract price has historically been lower than the world spot market price because long-term contracts were signed at a time of lower world prices. As a result, there are considerable differences between world spot prices and Australian unit export prices for uranium. As companies re-negotiate contracts, Australian unit export prices are expected to move closer to world spot prices.

Over the outlook period, Australia’s uranium exports are projected to increase as a result of high world demand and increasing prices. The projection is for export volume to grow in line with production at an average rate of 12 per cent a year to reach 13 700 tonnes by 2016–17 (see Figure 2). Export values are projected to grow at an average annual rate of around 18 per cent a year to $1.7 billion (in 2011–12 prices) by 2016–17.

Figure 2: Australia’s uranium exports


Table 2: Uranium outlook2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

WorldProduction kt 55.2 56.6 58.2 61.3 66.0 72.0 83.7 86.9– Africa b kt 10.5 10.3 10.7 11.7 12.5 13.4 16.4 19.0– Canada kt 9.8 8.6 8.6 9.4 10.1 12.9 16.7 16.7– Kazakhstan kt 17.8 19.5 19.5 21.9 23.8 24.5 25.0 25.0– Russian Federation kt 3.6 3.8 4.0 4.1 4.2 4.3 4.4 4.4

Consumption kt 79.8 73.8 77.3 88.7 95.2 95.4 104.6 110.2– China kt 3.4 4.8 4.1 9.0 13.0 15.9 17.5 15.6– European Union c kt 25.6 23.4 23.2 23.4 24.0 23.3 24.8 25.0

– Japan kt 9.4 3.3 3.3 9.0 9.3 8.6 8.6 8.6– Russian Federation kt 4.9 5.8 5.0 5.3 6.2 4.9 8.3 9.3

– United States kt 23.0 21.7 24.8 25.6 25.2 25.2 25.2 30.0Spot price US$/lb 47.0 56.8 53.0 59.3 64.1 68.4 71.8 74.2– real d US$/lb 50.1 58.5 53.0 58.2 62.2 65.7 68.2 69.5

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaProduction t 7109 7069 7079 7960 6240 7490 10630 13700Export volume t 7555 6950 7079 7960 6240 7490 10630 13700– nominal value A$m 757 610 707 777 621 757 1318 1940

– real value e A$m 807 630 708 755 588 696 1179 1687Average price A$/kg 100.2 87.7 99.9 97.6 99.6 101.0 124.0 141.6– real e A$/kg 106.8 90.6 99.9 94.9 94.2 92.9 110.9 123.2

b Includes Niger, Namibia, South Africa, Malawi and Zambia. c Regarded as 27 countries for all years. d In 2012 US dollars. e In 2011–12 Australian dollars. f BREE forecast. z BREE projection.

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Sources: BREE; ABS; Department of Resources, Energy and Tourism; The Ux Consulting Company, LLC http://www.uxc.com/.

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Resources outlook

Steel and steel-making raw materials

Rubhen Jeya and Tom Shael

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.

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.

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.

Steel

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.

Over the period 2013–2017 world steel consumption is projected to increase at an average annual rate of 3 per cent and reach 1.8 billion tonnes in 2017 (see Table 1). Steel consumption growth in OECD economies is projected to be modest because of assumed moderate growth in economic activity. By contrast, growth in non-OECD steel consumption is projected to be more rapid, supported by strong economic growth, rising household incomes and continued industrialisation.

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Table 1: World steel consumption and production (Mt)2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

Crude steel consumptionEuropean Union 160 164 164 166 168 171 173 176United States 90 94 96 98 101 104 107 110Brazil 30 31 32 34 35 36 37 38Russian Federation 42 44 45 47 48 50 52 53China 600 624 657 695 729 761 787 812Japan 68 69 74 77 78 80 81 83Republic of Korea 55 56 57 59 61 64 66 68Chinese Taipei 21 24 25 25 26 26 27 28India 66 76 82 88 95 101 107 113World steel consumption 1389 1450 1508 1575 1639 1694 1745 1803

Crude steel productionEuropean Union 173 176 177 178 180 184 187 191United States 81 86 89 92 94 96 98 100Brazil 33 35 37 39 41 43 45 47Russian Federation 67 69 71 74 77 80 83 87China 627 683 731 771 808 845 873 901Japan 110 108 111 113 115 116 118 119Republic of Korea 58 68 72 75 78 81 84 87Chinese Taipei 20 23 23 24 25 25 26 26India 67 72 78 83 88 93 98 105World steel production 1415 1511 1585 1651 1715 1773 1833 1892

Source: BREE.

Developing economies to dominate steel consumption growth to 2017

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

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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.

OECD steel consumption growth to be relatively slow

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.

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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 12th 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.

Raw materials

Raw material prices

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

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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


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.

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Table 2: World iron ore trade (Mt)2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

Iron ore importsEuropean Union 133 136 139 142 144 146 149 152Japan 134 128 134 136 138 140 142 143China 619 645 713 742 757 770 813 854Republic of Korea 56 64 67 72 75 78 80 83Chinese Taipei 19 22 23 23 24 25 25 26World imports 1051 1075 1149 1213 1279 1355 1439 1500

Iron ore exportsAustralia 402 439 493 525 588 678 749 779Brazil 311 313 333 372 411 443 467 489India 96 63 43 46 46 46 44 40Canada 33 34 36 37 37 38 38 38South Africa 48 54 58 64 67 71 75 79West Africa (Guinea & Mauritania) 11 12 14 15 17 23 35 47World exports 1051 1075 1149 1213 1279 1355 1439 1500

Source: BREE.

China’s reliance on imports to increase

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.

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Australia to dominate world seaborne trade

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.

Mine and infrastructure expansions at Fortescue Metals Group operations are expected to further add to Australia’s production and exports with the scheduled completion of more than 100 million tonnes of additional annual capacity by mid-2014 (see Table 4). Also supporting increased production in the first half of the outlook period will be two magnetite projects: CITIC Pacific Mining’s Sino Iron project (annual capacity of 28 million tonnes) and Gindalbie Metal’s and Ansteel’s Karara project (10 million tonnes). A number of smaller operations are also scheduled to start up over the outlook period including Mt Gibson Iron’s Extension Hill (3 million tonnes), an expansion at Cliff’s Natural Resources’ Koolyanobbing operation (additional 2.5 million tonnes) in Western Australia and stage 1 of Ironclad Mining’s and Tafford Resources’ Wilcherry Hill operation (2 million tonnes) in South Australia.

Table 4: Selected Australian iron ore projects over 20 million tonnesProject Company Expected

start upNew capacity

Advanced projectsChichester Hub (55–95 Mtpa) Fortescue Metals Group 2013 40 MtJindelbar mine and rail (WAIO) BHP Billiton 2014 35 MtSino Iron project CITIC Pacific Mining 2012 28 MtSolomon Hub (stage 1) Fortescue Metals Group 2013 60 MtNammuldi expansion Rio Tinto 2014 26 Mt

Less advanced projectsJack Hills project (stage 2) Crosslands Resources 2014/15 25–35 MtRoy Hill Hancock Prospecting 2014 55 Mt (lump and

fines)West Pilbara Aquila resources/AMCI 2014 30 Mt hematite

Source: BREE 2011, Mining Industry Major Projects, October 2011.

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Brazil to increase its iron ore exports…

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.

Figure 2: Major iron ore exporters


…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.

Box 1: The emergence of West Africa in seaborne iron ore trade

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.

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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


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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.

Table 3: World metallurgical coal trade (Mt)2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

Metallurgical coal importsEuropean Union 45 46 47 50 51 49 51 52Japan 58 55 55 56 57 57 57 57China 48 46 63 64 64 68 69 69Republic of Korea 28 34 34 35 37 38 39 41Chinese Taipei 5 7 7 7 7 7 8 8India 30 32 36 38 40 41 44 46Brazil 12 13 14 15 16 17 17 18World imports 273 271 297 306 319 333 347 354

Metallurgical coal exportsAustralia 159 133 157 170 185 199 215 219Canada 28 30 33 35 36 37 38 38United States 51 55 51 46 44 42 41 39Russian Federation 14 17 18 20 20 20 21 21World exports 273 271 297 306 319 333 347 354

Source: BREE.

India, China and Brazil to support growth in metallurgical coal demand

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,

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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.

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Australian metallurgical coal export growth supported by new projects

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.

Figure 4: Major metallurgical coal exporters


Table 5: Selected Australian metallurgical coal projects over 2 million tonnesProject Company Expected

start upNew capacity

Advanced projectsBurton Peabody Energy 2012 2–3 Mt hard cokingCaval Ridge/Peak Down expansion

BHP Billiton Mitsubishi Alliance (BMA)

2014 8 Mt coking

Curragh Mine Wesfarmers 2012 Increase to 8.5 MtDaunia BMA 2013 4.5 Mt cokingGrosvenor underground Anglo Coal Australia 2013 4.3 Mt hard cokingHunter Valley Operations Expansion

Rio Tinto/Mitsubishi 2012 6 Mt thermal and semi-soft coking

Ravensworth North Xstrata 2012 8 Mt thermal and semi-soft coking

Less advanced projectsAustar underground (stage 3) Yancoal Australia 2012/13 3.6 Mt hard coking

(ROM)Denham Peabody Energy 2014 5–6 Mt cokingEaglefield Expansion Peabody energy 2013 5.2 coking (ROM)Lenton New Hope Coal 2014 3.5 Mt cokingMaules Creek Aston Resources 2013 10.5 Mt semi-soft coking

and thermalMillennium Expansion Peabody Energy 2014 3.5 Mt coking (ROM)Minyango Caledon resources 2014 4.5 Mt thermal and

cokingMoranbah South Project Anglo Coal

Australia/Exxaro2014 6.5 Mt coking

Oaky Creek (phase 2) Xstrata 2015 5 Mt cokingWashpool Coal Project Aquila resources 2013 2.6 Mt hard coking

Source: BREE 2011, Mining Industry Major Projects, October 2011.

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Australian exports

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.

Over the outlook period, export volumes are forecast to rise by 8 per cent a year to 218 million tonnes in 2016–17. Australia’s export earnings from metallurgical coal are projected to total $30 billion (in 2011–12 dollars) in 2016–17 (see Figure 5).

Figure 5: Australia’s metallurgical coal exports


Table 6: Steel, iron ore and metallurgical coal outlook2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

WorldContract prices bIron ore c– nominal US$/t 112 153 140 134 132 129 124 116– real d US$/t 120 158 140 132 128 124 118 109Metallurgical coal e– nominal US$/t 191 289 221 224 219 208 196 195– real d US$/t 203 298 221 220 212 200 186 183

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaProductionIron and steel g s Mt 6.89 7.31 5.35 4.84 4.88 4.88 4.88 4.88

Iron ore Mt 423 450 504 530 566 647 735 783Metallurgical coal Mt 163 146 152 169 180 195 213 222

ExportsIron and steel g s Mt 1.55 1.78 1.19 1.04 1.03 1.03 1.03 1.03

Nominal value A$m 1120 1303 886 783 777 778 778 778

Real value h A$m 1193 1347 886 761 735 716 696 677

Iron ore Mt 390 407 473 514 550 631 719 767Nominal value A$m 35075 58387 59708 66644 70587 79533 86948 88259

Real value h A$m 37371 60340 59727 64820 66765 73157 77777 76777

Metallurgical coal Mt 157 140 148 166 176 191 209 218

Nominal value A$m 24526 29793 31094 30122 33321 34757 34754 34932

Real value h A$m 26131 30790 31104 29298 31517 31971 31088 30387

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b fob Australian basis, BREE Australia–Japan average contract price assessment. c Fines contract, 62% iron content basis. d In 2012 US dollars. e High-quality hard coking coal. For example, Goonyella export coal. g Includes all steel items in ABS, Australian Harmonized Export Commodity Classification, chapter 72, ‘Iron and steel’, excluding ferrous waste and scrap and ferroalloys. h In 2011–12 Australian dollars. f BREE forecast. s BREE estimate. z BREE projection.Sources: BREE; International Iron and Steel Institute; Coal Services Australia; Queensland Coal Board; UNCTAD.

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Gold

Adam Bialowas

Gold prices are projected to peak in 2012 at US$1810 an ounce before declining steadily over the remainder of the outlook period to around US$1200 (in 2012 dollars) by 2017.

The supply and demand fundamentals of the gold market are influenced by gold purchases by the official sector that are assumed to be substantial over the outlook period.

Gold mine production is forecast to increase over the medium term, underpinned by increased output from China, Latin America and Australia.

The value of Australian gold exports is set to decline over the outlook period to $14 billion in 2017 (in 2012 dollars) as the falling price of gold more than offsets increases in export volumes.

Gold prices to increase in 2012…

In 2011, the gold price averaged US$1569 an ounce, which represented a 28 cent increase on the 2010 average price of US$1225 an ounce. This was the tenth successive year the gold price had averaged higher than the previous year. Prices increased rapidly throughout the September quarter 2011 supported by concerns about the world economic outlook and the sovereign debt crisis in Europe.

In 2011, the high gold price was underpinned by investment demand associated with economic and financial uncertainty in the euro zone, and to a lesser extent the US. In times of economic uncertainty, gold provides a role as a ‘safe haven’ and alternative store of value. Significant purchases of gold by the official sector in 2011 also placed additional upward pressure on the price of gold.

In 2012, the gold price is forecast to increase by 16 per cent relative to 2011 to average US$1810 an ounce. There are a number of factors that will serve to support the price of gold at this level. They include: on-going uncertainty in world financial markets resulting from the debt crisis in some euro zone countries; negative real interest rates in the US that discourage holding of US dollars; continued central bank purchases of gold; and assumed inflationary pressures in emerging economies that makes gold attractive as a hedge against inflation.

Figure 1: Quarterly gold price


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…and ease over the medium term

In 2013, the gold price is forecast to decline by less than1 per cent, relative to 2012, to US$1800 an ounce. This outcome assumes a recovery in world economic growth that will reduce the speculative investment demand for gold in preference to other assets. An improvement in the world economy should also increase the willingness of investors to hold a greater share of their assets in equity and property. As a result, this will diminish the desire to hold gold for investment purposes.

Over the remainder of the outlook period (2014 to 2017), gold prices are projected to decrease as world economic growth is assumed to increase to levels consistent with long-term trends. The gold price is projected to average US$1610 an ounce (in 2012 dollars) in 2014 before declining to US$1200 an ounce (in 2012 dollars) in 2017 (see Figure 1).

There are significant upside risks associated with the price outlook for gold. In particular, the strength and pace of a global economic recovery will influence the risk profile of investors. In particular, on-going financial uncertainty and volatility provides support for higher than projected gold prices.

Gold fabrication demand to rise over the outlook period

Gold fabrication demand consists of gold used in jewellery, electronics, dental applications, medals, coins and other industrial uses. Gold used in jewellery—the largest component of gold fabrication—is estimated to have fallen by 2 per cent in 2011, relative to 2010, to 1979 tonnes. The decline in jewellery consumption in 2011 was due to high gold prices throughout the year as well as the high degree of price volatility which encouraged consumers to defer purchases until the direction of future gold prices was more certain. Jewellery demand in most countries is estimated to have fallen, with the exception of China, where jewellery demand rose by 16 per cent to 517 tonnes. In aggregate, however, overall gold fabrication demand fell by less than 1 per cent in 2011, relative to 2010, to 2766 tonnes. The lower overall decline was due to an increase in the purchase of gold coins and medals.

Gold fabrication demand in 2012 is forecast to increase by less than 1 per cent relative to 2011 to total 2780 tonnes (see Figure 2). The modest growth in fabrication demand reflects high gold prices that are expected to dampen consumption growth throughout emerging economies, such as China and India. In addition, Middle Eastern gold fabrication demand is forecast to fall in 2012 because of its reliance on gold jewellery exports to developed economies, particularly those in the European Union (EU).

Figure 2: Annual gold jewellery demand


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Over the remainder of the outlook period (2013 to 2017), consumption of fabricated gold is projected to increase at an average annual rate of 2 per cent to reach 3070 tonnes by 2017. The growth in consumption is attributed to weaker gold prices that are projected to support jewellery demand in both China and India. Rising incomes in these emerging economies over the outlook period will also increase the affordability of jewellery and other fabricated gold products for an increasing proportion of the population. In the EU and the US, fabricated gold consumption is expected to continue to decline as consumers substitute away from gold jewellery to other forms of jewellery. However, with a decrease in gold prices over the outlook period, the rate of decline in fabricated consumption in the EU and the US is expected to slow, compared with the previous 5 years.

Official sector to continue to be a net purchaser

After becoming a net buyer of gold in 2010 for the first time in over 20 years, the official sector registered a dramatic increase in net gold purchases in 2011. Official sector purchases of gold in 2011 totalled around 430 tonnes and represented a five-fold increase compared with 2010 levels. In 2012 official sector purchase of gold are expected to increase slightly to 450 tonnes (see Figure 3).

A major factor behind the transition of the official sector from a net seller to net purchaser of gold has been the concern of many central banks about exposure to foreign exchange risks. Traditionally, one of the major assets held by central banks are holdings of major currencies such as the US dollar, the euro and the yen. The devaluation of the US dollar relative to some national currencies and concerns over the euro has led to increased interest in gold as a means of diversifying central bank asset holdings. As a result, in 2011 there were large central bank purchases of gold made by Mexico (100 tonnes), the Russian Federation (87 tonnes), Thailand (53 tonnes) and the Republic of Korea (40 tonnes).

Figure 3: Net official sector sales


Over the remainder of the outlook period (2013 to 2017), official sector purchases of gold are projected to remain robust, although there is projected to be a gradual decline to purchases to total 325 tonnes in 2017. The decrease in central bank net purchases over the outlook period is because of an assumed increases in the world economic outlook and an improvement in the relative strength of the US dollar. However, as official sector gold purchases depend on a variety of special domestic circumstances, there is still considerable uncertainty over central bank net purchases of gold purchases over the outlook period.

Producer hedging to remain dormant

Producer hedging involves gold producers borrowing gold from central banks and selling it on to the spot market so as to reduce exposure to the risk of lower gold

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prices at the time of actual production. As a result, the value of future mine production is effectively brought forward.

In 2011, the outstanding hedge positions of global gold producers increased by 12 tonnes, compared with net dehedging of over 100 tonnes in 2010. Although an increase of hedged positions of 12 tonnes is relatively small, it is notable that 2011 was the first year in a decade when hedging positions were undertaken and which could indicate an expectation of lower gold prices by some market participants. These hedging positions, however, appear to have been undertaken principally as a means of securing financing for mine expansions and new mine developments.

In 2012, hedging or dehedging activities is expected to be relatively subdued. Any significant dehedging activity will be limited by the size of remaining hedge positions, which have largely been wound up over the past 5 years. High gold prices in 2012 should also discourage gold producers from taking out hedging positions. To 2017, the projected decline in the price of gold may result in an increase in hedging activities as producers seek to lock in high prices.

Scrap sales to reflect gold price movements

In 2011, the supply of gold scrap, largely sourced from recycled jewellery, declined for the second successive year, falling by 2 per cent to 1612 tonnes. While historically the supply of scrap gold has increased with higher prices, the apparent counterintuitive movement in 2011 may reflect scrap holders’ views of further increases in the price of gold.

In 2012, the supply of scrap is forecast to decrease by 4 per cent to 1550 tonnes. The fall in scrap supply reflects consumers’ willingness to hold gold in the absence of better alternative investments. The available stock of gold scrap is also placing downward pressure on sales as stock levels have been run down significantly over the past four years following successive increases in gold prices.

Over the remainder of the outlook period (2013 to 2017), the supply of scrap gold is expected to continue to decline with scrap supply projected to decrease to 1000 tonnes by 2017. The lower scrap supply is a result of reduced stocks of scrap, and gold holders reduced incentives to sell holdings at lower gold prices.

Production to increase modestly over the outlook period

In 2011, world gold mine production is estimated to have increased by 2 per cent, relative to 2010, to 2752 tonnes, the highest ever recorded annual global production. This represents the third consecutive year of world gold production growth and reflects the incentives that high gold prices provide to global producers to invest in developing gold projects.

Increases in gold production in Ghana, the Russian Federation and Canada were offset by production losses in Peru and Indonesia where declines in output occurred due to industrial disputes.

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World gold mine production in 2012 is forecast to increase by 3 per cent, relative to 2011, to 2840 tonnes. China’s gold mine production is forecast to increase by 3 per cent to 380 tonnes as a number of small gold mines start up, encouraged by high prices. Indonesia’s gold production is forecast to increase by 13 per cent to 130 tonnes under the assumption that Freeport McMoRan’s Grasberg mine returns to normal operating levels after being significantly affected by industrial disruptions in 2011. Gold production in the Russian Federation and central Asia is also forecast to increase as a number of operations that started production in 2011 are expected to increase production to full capacity.

Over the medium term (2013 to 2017), global gold mine production is projected to grow at an average rate of 2 per cent a year to reach 3120 tonnes by 2017. Steady growth in gold production is expected to come from Chile and Peru associated with expansions of a number of large copper mines which produce gold as a by-product. China is projected to remain the largest gold producer over the outlook period; however, China is unlikely to experience the strong production growth rates seen over the past few years. This is because many of China’s gold mines have relatively high costs and are small in scale, which could make many unprofitable if prices decline as projected over the medium term.

Offsetting the production growth in Latin America and China will be lower production from the US and South Africa. Falling production in these countries reflects a combination of factors such as declining ore grades, safety and labour issues, and a lack of new deposits to replace resources that are being exhausted.

Australian gold production to increase

Australian gold mine production in 2011–12, is forecast to increase by 1 per cent, relative to 2010–11, to total 268 tonnes. Supporting this increase in Australia’s gold mine production capacity is the start up of Crocodile Gold’s Cosmo Deeps operation (annual capacity of 3 tonnes) and St Barbara’s King of the Hills expansion at its Leonora operation (2 tonnes) in the second half of 2011. Increases in production in 2011–12 are also expected to be supported by increased output from Ramelius Resources’ Mt Magnet operation (2.5 tonnes) and Navigator Resources’ Cockburn pit at its Bronzewing operations (2 tonnes). Offsetting this growth in production from new or expanded operations will be lower output from a number of mines in the Northern Territory from partial flooding due to heavy rain in late 2011 and early 2012.

In 2012–13, Australian gold production is forecast to increase by 7 per cent, relative to 2011–12, to total 287 tonnes (see Figure 4). The start up and subsequent ramp up of production at Newcrest’s Cadia East operation (22 tonnes) is expected to provide the majority of the increase in Australian production. However, additional capacity is expected to come from the start up of new mines at Evolution Mining’s Mt Carlton operation (2.5 tonnes) and Silver Lake Resources’ Murchison mine (3 tonnes).

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Figure 4: Australian gold mine production by state


Australian gold production is projected to increase by 11 per cent to around 318 tonnes in 2013–14 and remain close to that level for the remainder of the outlook period. Mines that will contribute to production growth over these years include the Cadia East mine and new or expanded mines that are scheduled for completion within the outlook period. These new mines include: Southern Cross Golds’ Marda project (1 tonne) and Westgold Resources’ Central Murchison operation (3.5 tonnes).

Value of Australian exports to decline over outlook period

Australian gold exports consist of refined gold from Australian mine production and imports of gold dore (impure gold) and scrap gold, which are shipped to Australia and then refined into gold bullion and re-exported.

In 2011–12, the volume of Australian gold exports is forecast to increase by 10 per cent, relative to 2010–11, to total 331 tonnes. The increase in exports is expected to be supported by forecast higher domestic mine production and an assumed increased availability of scrap and gold dore from international sources as a result of continued high prices for gold. Reflecting both increased export volumes and increases in the Australian dollar price of gold, the value of Australia’s gold exports is forecast to rise by 33 per cent in 2011–12 to $17.3 billion.

In 2012–13, increases in exports of both Australian-produced and overseas-sourced gold are forecast to result in export volumes rising by 9 per cent to 361 tonnes. In 2012–13 the value of Australia’s gold exports is forecast to increase by a 19 per cent to $20.5 billion (see Figure 5). This reflects a combination of high gold prices and increased export volumes.

Between 2013–14 and 2016–17, Australia’s gold exports are projected to remain relatively stable ranging between 390 and 400 tonnes a year. With the real Australian dollar price (in 2011–12 dollars) of gold projected to decline significantly after 2013, the value of Australia’s gold exports is projected to decrease over the remainder of the outlook period. By 2016–17, the value of gold exports is projected to fall to $14 billion (in 2011–12 dollars), a level similar to that of 2010–11.

Figure 5: Australia’s gold exports


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Table 1: Gold Outlook2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

WorldConsumption t 2779 2766 2784 2759 2847 2840 2961 3065Mine production t 2689 2752 2842 2911 3011 3056 3102 3123Scrap sales t 1645 1612 1550 1450 1200 1100 1050 1000Residual net stock t (1555) (1598) (1608) (1603) (1364) (1316) (1191) (1058)

official sector t (73) (430) (450) (425) (400) (375) (350) (325)private sector t (1374) (1180) (1148) (1168) (954) (931) (831) (723)producer hedging t (108) 12 (10) (10) (10) (10) (10) (10)

Price b– nominal US$/oz 1225 1569 1806 1800 1656 1494 1388 1285– real c US$/oz 1307 1618 1806 1767 1609 1436 1317 1203

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaMine production t 240 265 268 287 318 325 327 326

Export volume t 335 301 331 361 392 399 394 396Export value– nominal A$m 12996 13016 17265 20519 20967 19579 17401 16087– real d A$m 13847 13451 17270 19957 19832 18009 15566 13994Price– nominal A$/oz 1236 1389 1644 1770 1665 1527 1374 1264– real d A$/oz 1317 1436 1644 1721 1574 1405 1229 1100

b London Bullion Market Association AM price. c In 2012 US dollars. d In 2011–12 Australian dollars. f BREE forecast. z BREE projection.Note: Net purchasing and dehedging shown in brackets.Sources: BREE; ABS; GFMS; LBMA.

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Aluminium

George Stanwix

Aluminium prices are expected to decline in 2012, compared with 2011. However, prices are projected to increase, on average, between 2013 and 2017, underpinned by stronger consumption growth relative to production growth.

Over the medium term, aluminium consumption is projected to increase as demand in the major semi-fabricated markets strengthens, providing a positive impetus to price.

Aluminium production growth is expected to occur mainly in emerging economies as a result of comparatively low energy costs.

Australian aluminium export earnings are expected to moderate over the outlook period associated with a decline in domestic production and lower export volumes.

Prices weak in the short term, but strengthening over the medium term

After reaching a peak of around US$2800 a tonne in May 2011, aluminium prices averaged US$2437 a tonne in 2011, 12 per cent higher than prices in 2010 (see Figure 1). In 2012, aluminium prices are forecast to decrease by 6 per cent, relative to 2011, to average US$2287 a tonne in response to weaker growth in world aluminium consumption associated with an assumed decrease in world economic growth. In 2012, the decrease in the aluminium price is expected to be constrained by higher production costs, including rising electricity and raw material costs that has already resulted in a number of aluminium producers reducing their production capacity.

Figure 1: Quarterly aluminium prices


Over the remainder of the outlook period (2013 to 2017), aluminium prices are projected to increase, in real terms, peaking at US$2640 a tonne (in 2012 dollars) in 2015 before easing to around US$2530 a tonne in 2017 (see Figure 2). The increase in prices reflects robust consumption growth in line with an assumed improvement in the economic outlook in OECD economies. Between 2013 and 2015, aluminium production is projected to increase at a rate less than consumption growth. This is partly because strong aluminium production growth in non-OECD economies will be partially offset by smelter closures in many OECD economies. In 2016 and 2017, aluminium prices are projected to moderate to around US$2500 a tonne (in real terms) in response to increased aluminium production, particularly from the Middle East. Global aluminium stocks are projected to decrease to 4.6 weeks of

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consumption by the end of 2017, compared with 8.8 weeks of consumption at the end of 2011.

Figure 2: Annual aluminium prices and stocks


Aluminium consumption growth to increase to 2017…

In 2011, world aluminium consumption is estimated to increase by 5 per cent, compared with 2010, to total 42 million tonnes following increased demand in all major aluminium-consuming economies. The rate of growth in world aluminium consumption is forecast to weaken in 2012 due to assumed lower economic and industrial production growth in some key aluminium markets. In 2012, global consumption of aluminium is forecast to increase by 4 per cent, relative to 2011, to total 44 million tonnes.

Over the medium-term, world aluminium consumption is expected to be underpinned by demand from the construction, aerospace and automobile manufacturing sectors, particularly within emerging economies. Between 2013 and 2017, world aluminium consumption is projected to increase at an average annual rate of 7 per cent to reach 62 million tonnes by 2017.

…supported by consumption growth in China

In 2011, world aluminium consumption in China is estimated to have increased by 11 per cent, compared to 2010, to total 18 million tonnes. Over the outlook period, China is expected to account for an increasing share of world growth in aluminium consumption. Growth in China’s aluminium consumption out to 2017 is expected to be supported by the economy’s continued urbanisation and industrialisation. In particular, continued urbanisation that requires additional housing and infrastructure and which is aluminium intensive will support growth in aluminium consumption.

Further support for growth in China’s aluminium consumption over the medium term will be rising household incomes that are expected to result in an increase in demand for domestically produced aluminium-intensive consumer durables, such as white goods and automobiles. The potential growth in China’s aluminium consumption is illustrated by its relatively low per capita aluminium intensity compared to the average intensity of major industrial economies such as Germany and the US (see Figure 3).

Figure 3: Aluminium consumption and income


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China’s relatively low consumption intensity, large population and rapidly growing GDP per person indicates that there is substantial scope for further growth in aluminium consumption over the outlook period. As a result, China’s aluminium consumption is projected to increase at an average annual rate of 10 per cent, between 2012 and 2017, to reach 31 million tonnes in 2017.

Aluminium consumption growth in the OECD is dependent on the strength of an economic recovery

In 2011, aluminium consumption in OECD economies is estimated to have increased by less than 1 per cent, compared to 2010, to total 16 million tonnes. Aluminium demand growth in 2012 in the OECD is forecast to remain weak, particularly in the European Union (EU) and Japan. In the US, aluminium consumption is forecast to increase underpinned by an upturn in activity within the aerospace and transportation manufacturing sectors.

Over 2013 to 2017, aluminium consumption in the OECD is projected to increase, underpinned by an assumed strengthening of economic growth in the EU, the US, and Japan. By 2017, OECD aluminium consumption is projected to total 20 million tonnes, or an average annual increase of 5 per cent a year between 2013 and 2017.

Aluminium production to respond to falling prices

In 2011, aluminium production is estimated to have increased by 6 per cent, relative to 2010, to total just below 44 million tonnes. The growth in aluminium production is primarily due to higher levels of output from China, the Middle East and India. In 2012, world aluminium production is forecast to increase by 2 per cent and to slightly exceed 44 million tonnes in total as a result of new smelters starting up in China and India. This growth, however, is expected to be offset by lower output from OECD economies where there have been a number of announced reductions in plant capacity.

Over the remainder of the outlook period (2013 to 2017), aluminium production is projected to increase at an average annual rate of 7 per cent a year, reaching 61 million tonnes in 2017. Over this period, the majority of production growth is expected to occur in non-OECD economies.

Non-OECD economies to underpin world aluminium production growth

Over the medium term, the growth in aluminium smelting capacity is expected to largely occur in countries where companies can secure long term, competitively priced power contracts.

China is projected to remain the largest aluminium producer over the outlook period. In 2011, China accounted for 41 per cent of world production; its large share reflecting cheap input costs such as labour and electricity. The Chinese Government is currently supporting the modernisation of its aluminium production industry by shutting down old and inefficient capacity and replacing these plants with smelters based on modern technology. Despite the shutdown of some existing capacity,

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China’s aluminium production is, nevertheless, projected to increase at a rate of around 6 per cent a year, between 2012 and 2017, to reach 25 million tonnes in 2017.

Supported by the availability of relatively cheap natural gas, there are plans to significantly expand aluminium production capacity in the Middle East. New projects scheduled to start up in the Middle East over the outlook period include Alcoa’s and Ma'aden’s Ras Al-khair smelter (annual capacity of 740000 tonnes) and the Sino Saudi Jazan smelter (annual capacity of 1 million tonnes) in Saudi Arabia; and EMAL’s Abu Dhabi smelter phase II expansion (520000 tonnes) in the United Arab Emirates (UAE). This new capacity is expected to result in production in the Middle East increasing at an average annual rate of 18 per cent between 2012 and 2017 to reach 9 million tonnes in 2017.

India’s aluminium production is expected to grow strongly over the period to 2017 as a result of the commencement of up to five smelters with a total capacity of 2 million tonnes a year. India’s aluminium production is projected to increase by 22 per cent a year, between 2012 and 2017, to reach 5 million tonnes by 2017.

OECD production growth weak

Aluminium production in the OECD is expected to grow at below 1 per cent a year, between 2012 and 2017, associated with increasing capacity utilisation that is expected to be largely offset by a reduction of existing capacity due to the closure of a number of older smelters.

As a result of increased cost pressures a number of aluminium producers have announced plans to curtail production capacity in the OECD. In 2011, Alcoa announced plans to permanently close a number of its higher-cost smelting operations in response to high energy costs and lower aluminium prices. The closures include the Portovesme smelter in Italy and La Coruña and Avilés operations in Spain as well as two smelters in the US (Rockdale, Texas and Alcoa, Tennessee). Together, the production plant closures amount to a reduction of 531000 tonnes a year of production capacity. Rio Tinto Alcan has announced the permanent closure of the 275000 tonne a year Zeeland Aluminium smelter (ZALCO) in the Netherlands. Norsk Hydro also announced in November 2011 that it would not restart idled capacity at its Sunndal primary aluminium smelter (annual capacity of 400000 tonnes) in Norway until market conditions improve.

The major additions to world capacity over the outlook period are expected to come from a number of projects currently at varying stages of planning and development (see Table 1).

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Table 1: Selected aluminium smelters expected to be commissioned over the outlook periodCountry Company Smelter Capacity

(kt)Start up Type

Bahrain Aluminium Bahrain Alba Sixth Potline 400 2015 na

Canada Rio Tinto Alcan Kitimat 136 2014 Brownfield

Iceland Century Aluminum Helguvik 360 2013 Greenfield

India Hindalco Aditya 359 Early 2013

Greenfield

Hindalco Jharkhand 359 2015 GreenfieldHindalco Mahan 359 Q1 2012 Greenfield

Vedanta Jharsuguda II 500 2014 Brownfield

Vedanta Korba III 325 Q3 2012 Greenfield

Indonesia NALCO East Kalimatan 500 2015 Greenfield

Iran SALCO and NFC China Lamard 276 Late 2012

Greenfield

Malaysia Chalco and GIIG Holdings

Samalaju, Sarawak

370 Mid 2015

Greenfield

Sumitomo and Press Metal

Sarawak Phase II 120 Early 2013

Brownfield

Oman Oman Oil, Abu Dhabi WEA, RTA

Sohar Phase II 360 2014 Brownfield

Russian Federation UC Rusal BEMO in

Krasnoyarsk 147 2013 Greenfield

UC Rusal Taishet in Irkutsk 375 2013 Greenfield

Saudi Arabia Ma'aden and Alcoa Ras Al-khair 740 2013 Greenfield

Binladin Group, Chalco and MMC

Sino Saudi Jazan Aluminium

1000 Late 2014

Greenfield

UAE DUBAL and Mubadala

EMAL Phase II 520 2013 Brownfield

Source: Harbor Aluminium.

Australia’s aluminium production to moderate

In 2011–12, Australia’s aluminium production is forecast to remain unchanged at around 1.9 million tonnes relative to 2010–11. In 2012–13, aluminium production is forecast to decline by 10 per cent to 1.7 million tonnes as a result of the closure of a 60000 tonne a year pot line at the Kurri Kurri aluminium smelter. The closure was announced by Norsk Hydro in January 2012.

Over the remainder of the medium term (2013–14 to 2016–17), the outlook for Australian aluminium production is uncertain. In February 2011, Alcoa announced that it was undertaking a review of operations at its Point Henry smelter (annual capacity 190000 tonnes) in light of the high cost environment in which it is operating. High costs reflect rising electricity, labour and other input costs and a high value of the Australian dollar. The review is expected to be completed in June 2012. Rio Tinto has also announced plans to review its Pacific Aluminium business, which

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includes the Bell Bay smelter in Tasmania, Boyne Island smelter in Queensland, and Tomago smelter in NSW.

On the basis of these company announcements it is assumed that Australian aluminium capacity will be curtailed over the outlook period. By 2016–17, Australia’s aluminium production is projected to decrease to around 1.2 million tonnes, a decrease of 38 per cent from 2010–11 levels.

Australia’s exports to decrease over the outlook period

In 2011–12, aluminium exports are forecast to remain unchanged, relative to 2010–11, at around 1.7 million tonnes, as a result of stable aluminium production (see Figure 4). Export volumes are forecast to decrease by 10 per cent, relative to 2011–12, to 1.5 million tonnes in 2012–13, in line with decreases in Australia’s aluminium production. Over the outlook period, export volumes are projected to decrease at an average annual rate of around 9 per cent (2013-14 to 2016–17) because of reduced domestic aluminium production

In 2011–12, the value of aluminium exports is forecast to decrease by 8 per cent, compared to 2010–11, to $3.8 billion due mainly due to lower prices. In 2012–13, Australian export earnings are forecast to decrease by a further 10 per cent, relative to 2011–12, to total $3.4 billion, largely because of lower export volumes. Over the remainder of the outlook period (2013-14 to 2016-17), aluminium exports earnings are projected to decrease as a result of lower aluminium export volumes. The value of aluminium exports is projected to decrease at an average annual rate of 6 per cent between 2013-14 and 2016-17, to total $2.7 billion in 2016-17 (in 2011-12 dollars).

Figure 4: Australia’s aluminium exports


Alumina

Alumina prices recovery to lag aluminium prices

In 2011, spot alumina prices averaged US$384 a tonne, an increase of 15 per cent from 2010. Spot alumina prices are forecast to fall in 2012 as world aluminium production growth weakens, which is expected to lead to a reduction in alumina demand. Over the remainder of the outlook period (2013 to 2017), alumina prices are projected to increase, in real terms, as a result of stronger aluminium production growth and, hence, alumina demand. Rising alumina production input costs associated with higher electricity, caustic soda and other raw materials prices are expected to provide further support for prices over the medium term. Between 2013 and 2017, the spot alumina price is projected to increase at an average annual rate of 1 per cent to US$363 a tonne (in 2012 dollars) by 2017.

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Australia’s alumina production to increase

In 2011–12, Australia’s alumina production is forecast to increase by 4 per cent to around 20.3 million tonnes, as production at Queensland Alumina’s refinery is assumed to return to capacity following flood-related impacts in the first half of 2011. Production at BHP Billiton’s Worsley refinery is also expected to increase in the March quarter 2012 following the completion of a 1.1 million tonne a year expansion. Australia's alumina production in 2012–13, is forecast to increase by around 13 per cent to 22.9 million tonnes underpinned by the completion of an expansion at Rio Tinto Alcan's Yarwun refinery near Gladstone. When the expansion is complete in late 2012, the Yarwun refinery capacity will increase by 2 million tonnes to 3 million tonnes a year.

Australia’s alumina production is projected to peak in 2013–14 at 24 million tonnes as production reaches full capacity at the expanded Yarwun and Worsley refineries. Over the remainder of the outlook period (2014–15 to 2016–17), Australia's alumina production is projected to remain at around 24 million tonnes as there are no further capacity expansions scheduled to be completed within this period.

Australian alumina export earnings to grow over the outlook period

Underpinned by higher production, Australian export volumes of alumina in 2011–12 are forecast to increase by 4 per cent, relative to 2010–11, to total 16.8 million tonnes (see Figure 5). In 2012–13, Australia's alumina exports are forecast to increase by a further 16 per cent to 19.5 million tonnes. By 2016–17, Australia's alumina exports are projected to reach 22 million tonnes, as a result of higher alumina production and an increased availability of supply associated with lower domestic consumption in the aluminium industry.

In 2011–12, higher export volumes are forecast to offset lower prices, and result in export earnings from alumina increasing by 14 per cent, relative to 2010–11, to total $6 billion. As prices and export volumes increase, Australia's alumina export earnings are forecast to reach $7.4 billion in 2012–13, an increase of 25 per cent from 2011–12. Over the remainder of the outlook period, alumina export earnings are projected to increase at an average annual rate of 6 per cent a year to reach $9.5 billion (in 2011–12 dollars) in 2016–17 as prices and export volumes increase.

Figure 5: Australia’s alumina exports


Table 2: Aluminium outlook2010 2011 2012 f 2013 f 2014 f 2015 z 2016 z 2017 z

WorldProductionPrimary aluminium kt 41093 43513 44192 48991 51946 55604 58884 61420

Consumption

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2010 2011 2012 f 2013 f 2014 f 2015 z 2016 z 2017 zPrimary aluminium kt 39657 41795 43923 49556 52789 55761 59049 61948

Closing stocksPrimary aluminium b kt 6501 7098 7687 7123 6279 6122 5957 5430

– weeks consumption 8.5 8.8 9.2 7.5 6.2 5.7 5.2 4.6

PricesLME aluminium– nominal US$/t 2170 2437 2287 2461 2662 2745 2691 2704

USc/lb 98 111 104 112 121 125 122 123– real c US$/t 2314 2513 2287 2415 2587 2640 2554 2532

USc/lb 105 114 104 110 117 120 116 115

Alumina– nominal spot US$/t 333 384 339 351 376 394 377 388– real spot c US$/t 355 396 339 345 366 379 358 363

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaProductionPrimary aluminium kt 1920 1938 1936 1899 1722 1639 1469 1410

Alumina kt 20056 19544 20474 22880 24360 24360 24360 24360Bauxite Mt 68 69 71 74 77 78 81 81

ConsumptionPrimary aluminium kt 312 296 235 228 207 197 176 169

ExportsPrimary aluminium kt 1624 1686 1701 1671 1515 1445 1293 1241

Nominal value A$m 3838 4178 3802 3750 3764 3829 3358 3152Real value d A$m 4089 4318 3804 3648 3560 3522 3004 2742Alumina kt 16653 16227 16818 19177 21003 21164 21495 21610Nominal value A$m 4969 5218 5970 7323 8874 9554 9492 9329Real value d A$m 5294 5392 5972 7122 8393 8778 8491 8116Bauxite kt 8023 8595 10765 8894 9256 10180 12981 12980Nominal value A$m 178 229 282 230 239 263 336 336Real value d A$m 190 237 282 224 227 242 300 292Total value– nominal A$m 8985 9625 10055 11303 12877 13646 13186 12817– real e A$m 9573 9947 10058 10994 12179 12552 11795 11150

b Producer and LME stocks. c In 2012 US dollars. d In 2011–12 Australian dollars f BREE forecast. z BREE projection.Sources: BREE; LME; WBMS.

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Copper

Adam Bialowas

Copper prices are forecast to peak in 2013 at US$8830 tonne before declining steadily over the remainder of the outlook period to around US$6770 (in 2012 dollars) in 2017.

World copper consumption is expected to increase at an average rate of 4 per cent a year to total 24.4 million tonnes by 2017. In 2017, China is expected to account for over 45 per cent of total world copper consumption.

World copper mine production is projected to grow strongly over the outlook period supported by extensive capacity additions in Chile and Peru. Mine production is projected to increase at an average annual rate of 5 per cent to total 21.5 million tonnes by 2017.

The value of Australian copper exports is set to decline over the outlook period to $9 billion in 2017 (in 2011–12 dollars) as falling copper prices counterbalance increasing Australian export volumes.

Copper prices to peak in 2013

In 2011, the price of copper averaged a record US$8852 tonne, an increase of 17 per cent compared to 2010. Throughout much of 2011 copper prices were supported by supply disruptions at a number of key operations including in Latin America and Indonesia. In the last quarter of 2011, the copper price fell because of uncertainty surrounding European debts and market expectations of weaker global economic growth (see Figure 1). At the end of 2011, the copper price was trading at US$7554 a tonne, compared with a peak of US$10048 a tonne in February 2011. At the end of 2011, copper stocks were around 2.6 weeks of consumption, down from 2.8 weeks of consumption at the end of 2010.

Figure 1: Quarterly copper prices


In 2012, copper prices are forecast to average $US8430 a tonne, a decrease of 5 per cent relative to 2011. The decrease in prices primarily reflects the absence of the large speculative component which was present in the first half of 2011. Thus, while the copper market is expected to remain tight in 2012, the average price is expected to be reflective of physical supply and demand fundamentals rather than financial factors, which was the case in early 2011. Copper stocks are expected to decline further in 2012 to 2.2 weeks of consumption (see Figure 2).

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Copper prices in 2013 are forecast to increase by 5 per cent to US$8830 a tonne as world copper consumption increases in line with the assumption of improved economic growth. While growth in refined copper production is expected to outpace growth in consumption in 2013, the market is expected to remain in deficit with stocks decreasing to around 2 weeks of consumption at the end of 2013.

Figure 2: Annual copper prices and stocks


Over the remainder of the outlook period (2014 to 2017), copper prices are projected to decline gradually. Growth in world copper consumption in the second half of the outlook period is projected to moderate to an average annual rate of 3 per cent compared with 5 per cent in 2012 and 2013. Production growth between 2014 and 2017 is projected to increase at an average annual rate of 4 per cent a year. As a result, stocks are projected to gradually increase each year reaching 3.4 weeks of consumption at the end of 2017. In 2017, world copper prices, in real terms, are projected to be US$6770 a tonne (in 2012 dollars).

World copper consumption to increase

In 2011, global copper consumption increased by less than 2 per cent, relative to 2010, to total 19.5 million tonnes. During the first half of the year, growth in apparent copper consumption was weak as high copper prices encouraged many consumers to run down stocks rather than make additional purchases. In the second half of 2011 copper consumption growth was limited by uncertainty surrounding the global economic outlook.

In 2012, world copper consumption is forecast to increase by 5 per cent to 20.4 million tonnes with the majority of this growth expected to occur in China. Copper consumption growth in the OECD in 2012 is forecast to be weak as housing construction and manufacturing activity remains subdued.

World copper consumption in 2013 is forecast to increase by a further 5 per cent, relative to 2012, to total 21.4 million tonnes as OECD economic growth is assumed to strengthen. Over the remainder to the outlook period (2013 to 2017) world copper consumption is projected to grow at an average annual rate of 4 per cent to reach 24.4 million tonnes in 2017. China is projected to contribute the majority of this growth and account for over 45 per cent of world copper consumption in 2017.

Emerging economies underpin copper consumption growth

In 2012, China’s copper consumption is forecast to increase by 8 per cent to 8.6 million tonnes following growth of 7 per cent in 2011. The strong rate of growth in 2012 reflects copper demand for housing and infrastructure construction and the manufacturing of consumer durables. In addition, China’s copper demand in 2012 is expected to be supported by the rebuilding of stocks after a large drawdown in 2011

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in response to high prices and tighter restrictions on liquidity. As a result, China’s copper consumption in 2013 is forecast to increase by 8 per cent relative to 2012 to total 9.2 million tonnes.

China copper consumption to continue increasing

Over the remainder of the outlook period, (2014 to 2017) China’s copper consumption is projected to increase at an average annual rate of 5 per cent to reach 11.3 million tonnes in 2017. Trends that have contributed to copper consumption growth in China over the past decade, such as industrialisation and urbanisation, are assumed to continue over the outlook period.

One of the characteristics of China’s economic development over the past decade has been the rate of urbanisation as people have migrated from rural areas to cities in search of employment. By 2017, over 51 per cent of the population is expected to live in cities around China, compared with a rate of 47 per cent in 2010. This equates to around 70 million people moving into urban areas over the next five years. In order to accommodate this shift, and to improve the affordability of housing, China’s 12th Five-Year Plan (2011–15) sets out a target of constructing an additional 36 million housing units. The increase in urban population will also need to be supported by an expansion of China’s electricity grids, and other infrastructure such as roads, rail and water networks.

The construction of housing and electricity infrastructure is particularly copper intensive and will underpin consumption growth into the second half of this decade. Also supporting growth in China’s copper consumption will be the production of consumer durables such as motor vehicles, white goods and electronic appliances.

In other emerging economies such as India and Brazil, and also in the Russian Federation, copper consumption is also projected to increase over the medium term. As with China, increased copper consumption in these countries reflects assumed growth in housing and infrastructure construction and consumption of consumer durables.

In the OECD, copper consumption growth is forecast to be moderate in 2012 and 2013 at around 2 per cent a year and to total 7.9 million tonnes in 2013. Copper consumption growth will be supported by reconstruction activities in Japan following the March 2011 earthquake and tsunami. Copper consumption in the US is also forecast to increase as automobile manufacturing and production for consumer durables are assumed to increase.

In 2014, and for the remainder of the outlook period, OECD copper consumption growth is projected to increase in line with improved economic conditions across the European Union, the US and Japan. Increased manufacturing activity and housing construction is expected to result in OECD copper consumption increasing at an average annual rate of 1 per cent between 2014 and 2017 to reach 8.1 million tonnes in 2017.

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World copper mine production supported by Latin America

In 2011, world copper mine production increased by less than 1 per cent, relative to 2010, to total 16.2 million tonnes. The weak growth in copper production reflects higher output in Africa being partially offset by lower output in Indonesia and Latin America that were associated with industrial relation disputes.

Mine production in 2012 is forecast to increase by 4 per cent relative to 2011 to reach 16.8 million tonnes, underpinned by production growth in Africa and Chile. In Africa, mine production is forecast to increase to around 1.7 million tonnes as First Quantum Minerals’ Kansanshi mine (annual capacity of 250000 tonnes) and Vedanta Resources’ Konkola operation (175000 tonnes) increase production to capacity after being commissioned in 2011.

In Chile, copper production in 2012 is forecast to increase by 14 per cent, relative to 2011, to 6 million tonnes. This increase is expected to be supported by the start up of new mines such as, Codelco’s and Freeport MacMoran’s El Abra mine (annual capacity of 135000 tonnes) and an expansion at Anglo American’s Los Bronces operation (additional 70000 tonnes). Also supporting global copper production growth is higher output from mines which were affected by industrial action in 2011.

Higher mine production over the medium term

Over the remainder of the outlook period (2013 to 2017) global copper mine production is projected to grow at an average rate of 5 per cent a year to reach 21.5 million tonnes by 2017. The bulk of this additional capacity is expected to come from large, existing producers in Chile and Peru.

In Chile, the world’s largest copper producer, production growth is projected to increase at around 3 per cent a year, reaching 7.1 million tonnes by 2017. A number of large copper mines are also scheduled to start production within the outlook period including Codelco’s Mina Minestro Hales operation (annual capacity of 170000 tonnes), Pan Pacific Copper’s Caserones project (180000 tonnes) and Goldcorp’s El Morro mine (200000 tonnes).

Peru is projected to be one of the fastest growing copper producers between 2013 and 2017, with production projected to increase at an average annual rate of 15 per cent a year to reach 2.6 million tonnes by 2017. New mines scheduled to commence production during the outlook period include Chinalco’s Toromocho operation (annual capacity of 275000 tonnes), Xstrata’s Las Bambas mine (310000 tonnes) and Minmetals’ El Galeno mine (200000 tonnes).

A potentially significant contributor to world copper production over the outlook period is the Oyu Tolgoi mine in Mongolia. The mine is based on one of the world’s largest undeveloped copper and gold resources and is majority owned by Rio Tinto. The US$6 billion project will have a copper production capacity of 450000 tonnes a year when complete in 2014.

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Growth in refined copper production to continue over the outlook period

Refined copper production in 2012 is forecast to increase by around 4 per cent, relative to 2011, to 20.3 million tonnes. Supporting increases will be the commissioning of various solvent extraction-electrowinning (SX-EW) projects, such as Freeport McMoRan’s El Abra operation (annual capacity of 135000 tonnes) in Chile and continued production ramp up at Katanga Mining’s Kamoto mine (150000 tonnes) in the Democratic Republic of Congo. Additionally, China, already the worlds largest producer of refined copper, is expected to continue increasing its refining capacity in 2012 through expansions at existing refineries in Jinchuan (additional 150000 tonnes) and Tianjing (100000 tonnes), as well as new refineries such as Zijin (150000 tonnes).

World refined copper production is projected to increase on average by 4 per cent a year over 2013–17 to total 24.6 million tonnes by 2017. Growth in SX-EW capacity is expected to account for a large proportion of this growth. Operations that use SX-EW technology are increasingly being developed due to their low capital and operating costs, relative to traditional refining processes, and the ability to extract metal from low grade ore that would otherwise be uneconomic to mine. In Africa, increase refined production from SX-EW operations is scheduled to come from the phase 2 expansion of Freeport McMoRan’s Tenke Fungurume project (annual capacity of 190000 tonnes) and the commissioning of China Nonferrous Metal Group’s Muliashi mine (40000 tonnes) in Zambia.

Australian production to increase

In 2011–12, Australia’s copper mine production is forecast to increase by 8 per cent, relative to 2010–11, to total 1 million tonnes. Increased production is supported by the start up of Hillgrove Resources’ Kanmantoo mine (annual capacity of 20000 tonnes) and Sandfire resources’ DeGrussa operation (77000 tonnes). Australian production of refined copper in 2011–12 is expected to remain unchanged compared to 2010–11 levels at 487000 tonnes, as an expected production increase by CST Mining’s Lady Annie operation balances out a planned refinery outage at BHP Billiton’s Olympic Dam operation.

Australian copper mine production in 2012–13 is forecast to increase by 14 per cent, relative to 2011–12, to total 1.2 million tonnes. Increased mine output is expected to come from initial production of underground operations at Newcrest's Cadia East Underground expansion (additional 80000 tonnes) and higher production from Ivanhoe’s Osborne mine and the commissioning of Venturex Resources’ Pilbara VMS operation (80000 tonnes).

Over the remainder of the outlook period (2013–14 to 2016–17) Australian copper mine production is projected to grow at an average rate of 3 per cent to reach 1.3 million tonnes by 2016–17. New operations scheduled to start up over this period include Golden Cross’ Copper Hill project (annual capacity of 37000 tonnes) in 2015 and Ivanhoe Australia’s Mount Elliot operation (40000 tonnes) in 2016. Additional

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output is assumed to come from an expansion at Rio Tinto’s Northparkes operation towards the end of the outlook period. Significant increases in copper production associated with the expanded Olympic Dam project are not assumed to occur until after 2016–17.

Australian production of refined copper in 2012–13 is forecast to increase by 3 per cent to 504000 tonnes before decreasing at an average rate of 7 per cent a year to 374000 tonnes in 2016–17. The significant decrease in Australia's refined copper production over the outlook period primarily reflects Xstrata’s decision to close its Townsville and Mt Isa refining operations by 2016. The closure of some refining capacity will be partially offset by the start up of new capacity such as Ivanhoe Australia’s Mt Dore SX-EW operation (annual capacity of 20000 tonnes) which is scheduled to commence operation in 2014.

Australian export earnings to decline

In 2011–12, the metallic content of Australian copper exports is forecast to increase by 10 per cent to 929000 tonnes, supported by higher export volumes of ores and concentrates. This increase is expected to more than offset the effects of a lower Australian copper price, resulting in a 7 per cent increase in the value of Australian copper exports to $9 billion.

Australian earnings (in 2011–12 dollars) from copper exports are projected to peak in 2013–14 at $10.7 billion, driven primarily by strong growth in the volume of exports of ores and concentrates (see Figure 3). Subsequent to this peak, export earnings are projected to decline to $9 billion (in 2011–12 dollars) in 2016–17 as a reduction in refined copper production leads to a decline in the metal content of Australian copper exports in conjunction with a projected decline in the export price of copper.

Figure 3: Australia’s copper exports


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Table 1: Copper outlook2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

WorldProduction– mine kt 16147 16209 16777 17771 18851 19922 20700 21 449– refined kt 19222 19578 20329 21376 22602 23310 24069 24 611Consumption kt 19204 19508 20420 21420 22456 23155 23742 24 442Closing stocks kt 1017 957 866 822 968 1123 1450 1 620

– weeks consumption 2.8 2.6 2.2 2.0 2.2 2.5 3.2 3.4

LME price– nominal US$/t 7534 8852 8431 8825 8150 7425 7300 7225

USc/lb 341.7 401.5 382.4 400.3 369.7 336.8 331.1 327.7– real b US$/t 8034 9126 8431 8662 7918 7140 6930 6765

USc/lb 364.4 413.9 382.4 392.9 359.2 323.8 314.3 306.9

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

Australia Mine output kt 819 952 1 025 1 168 1 259 1 293 1 307 1 301Refined output kt 395 485 487 504 504 504 444 374

Exports– ores and conc. c kt 1928 1750 2020 2428 2759 2927 3012 3587

– refined kt 271 375 383 365 353 353 346 220Nominal value A$m 6506 8422 9048 10481 11317 10851 10151 10326

Real value d A$m 6932 8703 9051 10194 10705 9981 9080 8983

b In 2012 US dollars. c Quantities refer to gross weight of all ores and concentrates. d In 2011–12 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABS; ICSG; WBMS.

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Nickel

Tom Shael

Nickel prices are forecast to be lower in 2012 and 2013, compared with 2011, averaging US$20700 and US$21300, respectively. By the end of 2017, prices are projected to average around US$20500 a tonne (in 2012 dollars), as higher stock levels and nickel pig iron production capacity limit the potential for higher nickel prices.

Consumption growth over the outlook period is projected to be supported by demand from China and other emerging economies. Demand in OECD economies is projected to remain subdued as a result of assumed relatively weak economic growth.

World mine production is expected to be supported by production at recently started or soon to be commissioned operations in South-East Asia.

Australia’s exports of nickel are projected to grow at an average rate of 6 per cent over the outlook period, reaching 300000 tonnes in 2017. Export values are projected to total $4.4 billion (in 2011–12 dollars) in 2016–17.

Nickel prices to recover from late 2011 lows…

From a peak of US$29030 a tonne in February 2011, nickel prices fell 42 per cent to a low of US$16935 in late November 2011 (see Figure 1). For 2011 as a whole, nickel prices averaged US$22854 a tonne, a 5 per cent increase from 2010. The significant decrease in nickel prices that occurred between August and late November 2011 was largely a reflection of uncertainty surrounding the outlook for the world economy associated with the euro zone crisis and weak US economic data.

Figure 1: Quarterly nickel prices


In 2012, the nickel price is forecast to decrease by 9 per cent, relative to 2011, to average US$20700 a tonne as fiscal consolidation and austerity measures in many European economies underpins assumed lower world economic growth and industrial production. Although this price is lower than the 2011 average, it is on par with the average price for the second half of 2011.

Nickel stocks in 2012 are forecast to increase by 20 per cent, compared with 2011, to reach 207000 tonnes, or around 6.5 weeks of consumption. The increase in stocks in 2012 is magnified by a large drawdown of reported stocks in 2011 (see Figure 2).

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Nickel prices in 2013 are forecast to increase by 3 per cent relative to 2012 and average US$21300 a tonne. Assumed stronger economic growth and industrial production in Europe and the US will support demand for nickel for use in stainless steel and nickel-containing metal alloy manufacturing. The growth in demand is forecast to be met by an increase in production and result in a slight increase in stocks to 222000 tonnes at the end of 2013, again representing around 6.5 weeks of consumption.

Figure 2: Annual nickel prices and stocks


…and stabilise over the outlook period

Over the outlook period significant increases in the nickel price are expected to be limited by nickel pig iron production. Nickel pig iron is a ferronickel pig iron containing 4–6 or 8–13 per cent nickel. It contains much less nickel than conventional ferronickel (25–40 per cent) and has higher concentrations of sulphur and phosphorous. The influential presence of nickel pig iron in the nickel market began in the mid-2000s when Chinese stainless steel manufacturers started to use the pig iron as a substitute for conventional ferronickel in response to very high nickel prices.

Nickel pig iron production generally becomes profitable when the nickel price is around US$18000 a tonne. If the nickel price were to remain significantly above this level for a sustained period of time, nickel pig iron production would increase and would be used as a substitute for conventional ferronickel.

While the presence of nickel pig iron production capacity may place downward pressure on prices, over the medium term the nickel price will be supported by the increasing reliance on production from laterite ores. The processing of these ores (see Box 1) is significantly more expensive than the traditional source of nickel, sulphide ores. The higher production costs of these ores will effectively limit the potential for substantial and extended periods of low nickel prices, as some nickel mine production would become untenable at prices below US$18500 a tonne.

Over the medium term, the effect of nickel pig iron refining capacity in China and the increased amount of nickel sourced from laterite ores are projected to result in nickel prices averaging around US$20500 a tonne (in 2012 dollars) in 2017.

Over the outlook period, nickel consumption is projected to increase at a slightly faster rate than production, resulting in a slight supply deficit in 2017 with stocks decreasing to 224000 tonnes, or 6.1 weeks of consumption.

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Consumption growth to moderate over the medium term

In 2011, world nickel consumption is estimated to have increased by 7 per cent, relative to 2010, to reach 1.6 million tonnes as strong consumption growth in the first half of 2011 was partially offset by weak consumption in the second half of the year associated with economic uncertainty surrounding the euro zone economies.

Growth in stainless steel and nickel-containing metal alloy production (particularly in China) will be the primary driver of nickel consumption over the outlook period, as approximately 60 per cent and 20 per cent of nickel is used in these two manufacturing processes, respectively. In 2012, world consumption of nickel is forecast to increase by 5 per cent, relative to 2011, to total 1.7 million tonnes (see Table 1).

In 2012, nickel consumption in non-OECD economies is forecast to increase, supported by growth in developing Asian economies. Consumption growth in China and India is a result of the expansion of urban infrastructure and housing developments and ongoing industrialisation and urbanisation. In particular, infrastructure construction in China’s western provinces will provide support for nickel demand in the short term. As a result, nickel consumption in China in 2012 is forecast to increase by 8 per cent, to 735000 tonnes, which equates to 66 per cent of total growth in world consumption for the year.

Table 1: World nickel consumption (kt)2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

China 575 680 735 785 820 850 865 875European Union 326 339 341 369 384 390 400 406India 34 35 37 40 43 46 50 54Japan 149 156 160 163 165 165 165 165Republic of Korea 74 74 78 85 90 92 94 95United States 120 123 130 133 134 135 135 134

World consumption 1464 1572 1656 1757 1821 1870 1906 1929

Sources: BREE; INSG.

Over the remainder of the outlook period (2013 to 2017), growth in world nickel consumption is projected to average 2 per cent a year, reaching 1.9 million tonnes in 2017. Growth will continue to be underpinned by an increased demand for stainless steels in emerging economies. Given these economies’ low nickel consumption per person compared with many developed economies, there appears to be substantial growth potential in nickel consumption within emerging economies over the medium term.

Over the outlook period, nickel consumption will be supported by growth in stainless steel production. However, the effect of stainless steel production on nickel demand will be partly offset by an expected continued substitution away from nickel-intensive varieties. Production of austenitic (300 series) stainless steels, which has the highest nickel content of 8–10 per cent, is expected to gradually decline. This

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production is expected to be replaced by martensitic (200 series, 2–3 per cent nickel) and ferritic (400 series, no nickel) stainless steels, which increase the content of other minerals, such as manganese and chromium, to achieve the strength and anti-corrosive qualities that nickel provides.

Despite being currently only 5 per cent of total nickel consumption, an important factor in the outlook for nickel consumption are developments within the growing battery market, including for electric cars, and mobile devices such as phones, cameras and computers. Recent improvements to lithium-ion batteries have created competition for the nickel metal hydride battery. However, the replacement of nickel-based batteries by lithium batteries will be limited by their respective properties. Traditionally nickel-based batteries have a superior shelf-life and are more durable than lithium batteries. On the other hand, lithium batteries can easily be made into a variety of shapes, are much lighter than nickel-hydride batteries, and do not suffer from the ‘memory effect’ where batteries gradually lose their maximum energy capacity with repeated recharging. These characteristics have led to technology developments that combine lithium and nickel to produce a battery which has higher energy potential, longer life and fewer fire risks. Increased purchases of both electronic consumer goods and energy efficient motor vehicles are expected to create a larger market for these batteries and, subsequently, for nickel.

Over the medium term, nickel consumption in the OECD is projected to grow moderately as a result of a recovery in private consumption of nickel-intensive goods following the assumed sovereign debt related economic slow-down in 2012. To 2017, nickel consumption is projected to grow at an average of 3 per cent a year in the European Union (EU), to reach 406000 tonnes; 2 per cent a year in the US, to reach 134000 tonnes; and 1 per cent a year in Japan, to reach 165000 tonnes.

In 2017, nickel consumption is projected to reach 875000 tonnes in China and 54000 tonnes in India, representing average growth rates of 4 per cent and 8 per cent a year, respectively. Growth in both India and China will be underpinned by construction of urban infrastructure and demand for consumer durables.

Mine production to be supported by new laterite projects

In 2011, world nickel mine production is estimated to have increased by 23 per cent, relative to 2010, to total 1.9 million tonnes. This large increase was underpinned by a 128 per cent increase (to 135000 tonnes) in Brazil’s output, which was supported by the start up of the Onça Puma and Barro Alto mines. Also contributing to this rise in world production was a 41 per cent jump (to 223000 tonnes) in Canada’s mine production, following the settlement of two years of labour related disputes.

In 2012, world nickel mine production is forecast to increase by 2 per cent, relative to 2011, to total just under 2 million tonnes (see Table 2). This will largely be supported by small increases in mine production from Australia, Finland and many small producers in Africa.

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Table 2: World nickel mine production (kt)2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

Australia 168 212 217 223 234 252 263 265Brazil 59 135 135 135 135 140 140 145Canada 158 223 225 225 220 220 220 220Indonesia 236 294 295 295 290 290 290 290Russian Federation 270 270 272 275 275 275 275 275Philippines 190 245 245 245 250 250 250 250

World mine production 1576 1942 1984 2039 2124 2204 2255 2297


Over the remainder of the outlook period (2013 to 2017), most expansions to production capacity are expected to be from new nickel laterite operations in New Caledonia, Madagascar, Papua New Guinea and Myanmar. The increasing scarcity of high-quality and easily accessible sulphide deposits suggests that the trend toward higher exploitation of laterite reserves will continue over the outlook period and beyond (see Box 1).

New projects scheduled to start up over the outlook period include: Vale’s VNC (annual capacity of 60000 tonnes) and Xstrata’s joint venture Koniambo (60000 tonnes) projects in New Caledonia; Sherritt International’s joint venture Ambatovy (60000 tonnes) project in Madagascar; China Metallurgical Group’s Ramu (31150 tonnes) project in Papua New Guinea; and China Nonferrous Mining Group’s Tagaung Taung (22000 tonnes) project in Myanmar.

Mine production in 2017 is projected to increase to 210000 tonnes in New Caledonia, 45000 tonnes in Madagascar (ramping up from 2012), 25000 tonnes in Papua New Guinea (ramping up from 2013) and 19000 tonnes in Myanmar (ramping up from 2013). By 2017, world nickel mine production is projected to reach 2.3 million tonnes, representing average growth of 3 per cent a year from 2013.

Mine production in the Philippines is projected to plateau at around current levels and to decrease slightly in the case of Indonesia. This is expected to be the result of projected moderating nickel pig iron production in China (see below). Despite rumours that Indonesia may introduce an export ban on unprocessed raw materials from 2014, it has been assumed in the preparation of this outlook that this will either not eventuate or will have only a negligible impact on laterite exports from the South-East Asian country.

Production increases in Australia over the medium-term are expected to contribute to higher world nickel mine production. The main sources of the increase will be the redevelopment of the Ravensthorpe nickel laterite mine by its new owners First Quantum Minerals, the start up of Norilsk Nickel's Honeymoon Well operation, and new production from many smaller operations including Metallica Metals’ NORNICO and Lucky Break, and Poseidon Nickel’s Mt Windarra. BHP Billiton recently announced it will be reducing mine production at its Nickel West operation by 30 per

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cent, with the expectation the reduction will last until early-2013. The effect of this business decision is forecast to be outweighed by the redevelopment of the Ravensthorpe mine, resulting in 2 per cent growth in Australian mine production in 2012, relative to 2011. Over 2013 to 2017, Australian nickel mine production is projected to increase at an annual average of 4 per cent a year to reach 265000 tonnes.

Box 1: Changing sources of nickel—laterite and sulphide ores explained

Nickel is found predominantly in two types of ore bodies: higher content sulphides—greater than 10 per cent nickel—and lower content laterites—around 1.5 per cent nickel. Sulphide deposits tend to occur deeper below the surface, where nickel occurs as the compound Pentlandite, (Ni, Fe)9S8. Laterite deposits occur closer to the surface—typically in tropical regions—with the nickel occurring in oxide compounds (limonites) and silicate compounds (saprolites).

Laterite ores are estimated to account for around 70 per cent of the world’s nickel resources, yet only 45 per cent of the world’s annual nickel production is sourced from these ores. This is because nickel sulphides are easier to process and cost less to develop, despite being more difficult to access because of their depth. The development of nickel laterite projects has continued to be high cost and technically difficult despite significant research and development over the past 30 years.

Nickel sulphide ores are converted to nickel metal using conventional flotation and pyrometallurgical processes. The ore is crushed, ground and undergoes flotation before being smelted to produce nickel matte, which usually contains around 70 per cent nickel. The matte is then further refined either by leaching, roasting or electrorefining.

There are two processes by which nickel laterite ores can be converted to metallic nickel: hydrometallurgical and pyrometallurgical.

Hydrometallurgical processes

Hydrometallurgical processes are energy intensive because the ores need to be partially dried before the subsequent phases of the process can begin. However, once the ores are dried, the processes tend to rely on chemical activity such as leaching solutions (using acid or ammonia) at various temperatures and pressures, rather than smelting in furnaces at high heat. These processes usually produce nickel metal (of varying nickel content) as the end product.

The main problem with hydrometallurgical processing is the rate of nickel recovery is lower. Typically, maximum economic recovery is around 85 per cent. As a result, ores need to have a relatively higher grade for these processes to be economic. There are several existing hydrometallurgical processes, that include rotary kiln electric refining (RKEF), the Caron process, high pressure acid leaching (HPAL) and heap leaching.

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Pyrometallurgical processes

Pyrometallurgical processes (smelting) are more suited to processing saprolite (high clay content) than limonite (high iron content) ores. The process is energy intensive because the ores must be completely dried before they can be processed to prevent steam building up during the smelting process and becoming a safety risk. Typically, ferronickel or nickel matte is produced as the end nickel product. Ferronickel is often used as a direct input into stainless steel manufacturing without further processing. However, nickel matte must undergo leaching, roasting or electrorefining as occurs in the processing of sulphide ores.

Irrespective of the method used, it is more expensive both in terms of capital costs and marginal costs to process nickel from laterite ores than sulphide ores. In addition, each laterite ore is unique (e.g. different clay content) because of the rock formation process and, hence, extraction processes must be adapted to each deposit.

Laterite production is expected to become increasingly important to world nickel output. For these projects to remain economic and nickel production to increase, prices will need to remain high enough to cover the costs of production at these projects.

Refined production to follow mine production

In 2011, world refined production is estimated to have increased by 11 per cent; led by strong nickel pig iron production growth in China and the restart of production at some operations in Canada after the resolution of long-standing labour disputes. In 2012 and 2013, world refined production is forecast to grow by 6 and 5 per cent, respectively; reaching just under 1.8 million tonnes by the end of 2013 (see Table 3). Production growth over the short term is forecast to be supported by China (adding 29 00 tonnes over 2012 and 2013), Australia (21000 tonnes), Japan (17000 tonnes), Madagascar (13000 tonnes), New Caledonia (10000 tonnes) and Brazil (10000 tonnes).

Table 3: World refined nickel production (kt)2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

Australia 102 110 134 131 130 129 130 130Canada 105 144 148 150 150 150 150 150China 332 411 430 440 440 435 435 435Finland 49 49 52 55 57 60 62 65Japan 166 158 165 175 175 175 178 180Russian Federation 262 267 267 270 270 270 270 270

World refined production 1446 1600 1690 1773 1829 1872 1906 1924


Over the medium term, growth in refined nickel production is expected to largely mirror growth in mine production. Production from on-site refineries at new

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operations is projected to underpin average growth of 3 per cent a year over the outlook period. By 2017, world refined nickel production is projected to be 1.9 million tonnes.

Australia’s refined nickel production is projected to grow strongly in 2012 before declining slowly to 130000 tonnes by 2017. The growth is expected to be supported by the redevelopment of the Ravensthorpe mine by First Quantum and the expected start up of some of Norilsk Nickel’s Australian operations.

China has been rapidly expanding its nickel refining capacity through nickel pig iron. However, this is expected to moderate over the medium term for several reasons. First, as explained in Box 1: Nickel Pig Iron and its impact on the nickel market (REQ December 2011, pp. 62–63), nickel pig iron swing production capacity effectively caps the nickel price (although the capping price will rise with input prices, particularly electricity, which accounts for around one quarter of input costs). This means nickel pig iron will still be employed in China for its ease of integration into stainless steel manufacturing, but will predominantly serve as world swing supply.

Second, the changing mix of stainless steel demand (particularly in China) in favour of the nickel-free ferritic and low nickel martensitic stainless steels will limit the demand for nickel pig iron. Martensitic stainless steel also requires the low nickel (4–6 per cent) variety of nickel pig iron, which is more expensive to produce compared to the higher (8–13 per cent) variety. The cost difference arises from the method of production. The low nickel variety is mostly produced in blast furnaces, with current production costs estimated at around US$21000 a tonne. The higher nickel content nickel pig iron, which is produced primarily in electric arc furnaces, has an estimated production cost of US$15000 a tonne.

Over the outlook period, China’s refined nickel production is projected to remain relatively flat, totalling 435000 tonnes in 2017. Flat domestic production is not assumed to adversely impact China’s exports of stainless steel (which are actually expected to increase over time). Instead, rather China’s dependence on imported final nickel is assumed to rise (see Figure 3).

Figure 3: China’s refined production, consumption and apparent imports


Australia’s exports volumes to increase steadily

In 2011–12, Australia’s export volumes are forecast to increase by 16 per cent, relative to 2010–11, to 243000 tonnes. The increase in export volumes will be driven largely by higher production from restarted operations, including First Quantum Minerals’ Ravensthorpe and Norilsk Nickel’s Lake Johnson, despite lower production at BHP Billiton’s Nickel West Kwinana refinery. Even with this large increase in export volumes, earnings from nickel are forecast to decrease by 2 per cent to $4 billion, as a result of an expected 20 per cent drop in the Australian dollar nickel price. The

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lower forecast Australian dollar nickel price is a result of lower forecast world nickel prices and a stronger Australian dollar compared with 2010–11.

Over the remainder of the outlook period (2012–13 to 2016–17), Australia’s nickel export volumes are projected to increase at an average annual rate of 4 per cent to reach 300000 tonnes in 2016–17 (see Figure 4). The projected increase in nickel export volumes corresponds to higher mine and refined production. Export earnings are projected to increase moderately over the outlook period to total $4.4 billion (in 2011–12 dollars) in 2016–17, as projected declines in the Australian dollar nickel price partially offset increases in export volumes.

Figure 4: Australia’s nickel exports


Table 4: Nickel outlook2010 2011 2012

f2013 f

2014 z

2015 z

2016 z

2017 z

WorldProduction– mine kt 1574 1942 1984 2039 2124 2204 2255 2 297– refined kt 1446 1600 1690 1773 1829 1872 1906 1 924Consumption kt 1464 1572 1656 1757 1821 1870 1906 1 929Stocks kt 213 172 207 220 227 229 229 224– weeks consumption 7.6 5.7 6.5 6.5 6.5 6.4 6.2 6.0

LME price– nominal US$/t 21800 22854 20661 21268 20585 20800 21225 21893

USc/lb 989 1037 937 965 934 943 963 993– real b US$/t 23245 23560 20661 20874 20000 20000 20150 20500

USc/lb 1054 1069 937 947 907 907 914 930

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

AustraliaProduction– mine c s kt 157 195 219 218 230 241 260 265– refined kt 120 101 124 132 131 129 130 130– intermediate kt 43 60 70 83 86 89 102 105

Export volume d s kt 221 210 243 265 270 273 291 300

Export value– nominal s A$m 3875 4096 4012 4590 4612 4608 4862 5091– real e s A$m 4129 4233 4014 4465 4362 4239 4349 4429

b In 2012 US dollars. c Nickel content of domestic mine production. d Includes metal content of ores and concentrates, intermediate products and nickel metal. e In 2011–12 Australian dollars. f BREE forecast. s BREE estimate. z BREE projection.Sources: BREE; ABS; INSG; LME.

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Zinc

Clare Stark

World zinc prices are projected to rise at an average annual rate of 5 per cent over the outlook period to reach US$2664 a tonne (in 2012 dollars) by 2017.

Relatively strong consumption growth in developing economies, particularly China, is projected to offset weaker demand growth in the OECD.

Australian zinc exports volumes (total metallic content) are projected to increase at an average annual rate of 5 per cent over the outlook period to total around 2 million tonnes by 2017.

Reflecting higher export volumes and projected higher world prices, Australian export earnings are projected to increase at an annual average rate of 6 per cent over the outlook period to reach around $2.9 billion (in 2011–12 Australian dollars) in 2017.

World zinc prices remain volatile

In 2011, zinc prices averaged around US$2195 a tonne, an increase of 2 per cent relative to 2010 (see Figure 1). During 2011, zinc prices were notably volatile, particularly in the second half of 2011, associated with uncertainty over European sovereign debt and the outlook for global economic growth. The volatility in zinc prices has continued in the first two months of 2012 with prices trading between US$1827 a tonne and US$2179 a tonne.

For 2012 as a whole, zinc prices are forecast to average US$2075 a tonne, a decrease of 5 per cent compared with 2011. The decrease in price reflects weak growth in zinc consumption associated with an assumed easing of economic growth in most developing economies and weak economic growth in OECD economies. Zinc production is also forecast to increase at a faster rate than consumption as new mines commence production. Accordingly, world zinc stocks are forecast to be equal to 8 weeks of consumption by the end of 2012, an increase of 2 per cent compared with the end of 2011.

Figure 1: Quarterly zinc prices


Stocks remain above historical levels

London Metal Exchange (LME) stocks during 2011 remained at historically high levels, although stocks fluctuated from a 15 year peak of around 895000 tonnes in early July to around 736000 tonnes in early December 2011. Stocks have risen during

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the first two months of 2012 to average around 840000 tonnes, significantly higher than the 15 year average of approximately 426000 tonnes. The higher levels of stocks reflect growth in refined zinc production outpacing consumption in 2011, as well as the emergence of a carry trade where large volumes of metals, including zinc, are used as security for bank lending.

Prices to rise over the outlook period as the market moves towards deficit

Over the remainder of the outlook period (2013 to 2017), zinc prices are projected to increase as consumption growth increases at a faster rate relative to production growth. Zinc consumption is projected to grow at an annual average rate of 4 per cent a year. However, refined zinc production is projected to grow at only 3 per cent a year, with increases in mine and refined capacity partially offset by the closure of a number of large operations. Between 2013 and 2017, zinc prices are projected to increase at an average annual rate of 4 per cent to reach US$2664 a tonne (in 2012 dollars) by 2017 (see Figure 2). Reflecting the market deficit over the second half of the outlook period, zinc stocks are projected to decrease to 1.5 weeks of consumption in 2017, down from a peak of 8 weeks of consumption in 2012.

A key risk to the outlook for zinc prices is the timing of new projects starting up production. With a number of large operations scheduled for closure, because of exhaustion of reserves, new projects will be required to replace this capacity. Delays to the start up of new projects could place upward pressure on zinc prices.

Figure 2: Annual zinc prices and stocks


Strong consumption growth over the outlook period…

In 2011, world zinc consumption increased by 1 per cent, relative to 2010, to total 12.7 million tonnes and is forecast to grow by a further 5 per cent in 2012 to total 13.3 million tonnes. Over the outlook period, growth in consumption is projected to average around 4 per cent a year, resulting in world consumption increasing to 16.5 million tonnes by 2017.

Around half of all world zinc consumption occurs through galvanising, an anticorrosive coating for steel. The extra protection provided by zinc depends on the environment in which the galvanised steel product is used. For example, galvanised steel is estimated to extend the life span of steel by 40 years in urban environments, and by as much as 100 years in a relatively lower polluted, rural environment. These properties, and its lower price compared with stainless steel, enable galvanised steel to be utilised extensively in structural applications such as telecommunications and electricity infrastructure, housing, railways, and bridges.

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Zinc based alloys for die casting, brass and bronze represent a third of world zinc consumption. These products are widely used in the manufacturing industry for the production of household appliances, electronics, and automobiles. For example, the average car is estimated to contain around 17 kilograms of zinc in the form of galvanised and die cast parts.

…underpinned by China and other emerging economies

In recent years, China has emerged as a major consumer of zinc, accounting for 43 per cent of world zinc consumption in 2011 This is a substantial increase compared with 1992 when China accounted for only 8 per cent of zinc consumption (see Figure 3). Over the outlook period, China is likely to maintain, and possibly increase, its share of world zinc consumption as its economy continues to urbanise and industrialise. Other emerging economies, such as India, are also projected to increase zinc consumption.

Figure 3: Distribution of world zinc consumption


The significant investment in infrastructure required to support the rapid expansion in industrial production in emerging economies over recent years has provided support for world zinc consumption. In China, the government reportedly intends to increase rail capacity by 20000–30000 kilometres by 2020. The Indian Government has also identified significant investment in expanding and strengthening rail infrastructure, the main transport method for bulk freight in India and that will facilitate the expected growth in India's industrial production.

Substantial public sector investment in infrastructure and housing is expected to contribute to increasing zinc demand over the outlook period. As part of China’s 12th Five-Year Plan (2011–15), the Chinese Government has committed to constructing and renovating a substantial amount of housing for low-income households in urban areas, as well as renovating housing in rural areas. Further development of electricity and telecommunication distribution infrastructure to manage with a growing demand for better and higher quality infrastructure in urban areas will also contribute to growth in zinc consumption.

The expansion of the middle class in emerging economies, consistent with rising per capita income arising from strong economic growth, is likely to also support demand for consumer durables, such as automobiles and household appliances. In turn, this should increase zinc consumption. Growing demand for motor vehicles has emerged as an important driver of demand for zinc and this growth is expected to continue over the outlook period.

Over the outlook period, zinc consumption in China is projected to grow at an annual average rate of around 6 per cent to total approximately 7.8 million tonnes by 2017.

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Zinc consumption in India is projected to grow at an annual average rate of around 5 per cent to total approximately 756000 tonnes by 2017.

Moderate growth in OECD economies

In 2012, zinc consumption in the OECD is forecast to increase 6 per cent, compared with 2011, to total 5.2 million tonnes. Increases in consumption in the US and Japan will be partially offset by lower consumption in Europe.

Japan's zinc consumption is forecast to increase because of rebuilding activity associated with significant damage to utilities, buildings and infrastructure following the March 2011 earthquakes and tsunami. Growth in US zinc consumption in 2012 is expected to be underpinned by higher manufacturing output, in line with recent increases in capacity utilisation (see Figure 4).

Over the remainder of the outlook period (2013 to 2017), zinc consumption in OECD economies is expected to grow at an annual average rate of around 3 per cent to total 5.8 million tonnes by 2017, based on the assumption of ongoing recovery in economic growth.

Figure 4: US manufacturing capacity utilisation


World zinc mine supply increasing steadily…

In 2011, world zinc mine production is estimated to have grown by 6 per cent relative to 2010 to total 13 million tonnes. An additional 350000 tonnes of zinc metal is forecast to be produced in 2012, enabling a 3 per cent rise in total output to 13.4 million tonnes. Increased zinc production in 2012 reflects the start up, in 2011, of Hindustan Zinc’s Rampura Agucha expansion in India (additional annual capacity of 100000 tonnes) and Xstrata, BHP Billiton, Teck and Mitsubishi’s joint venture Antamina mine in Peru (annual capacity of 300000 tonnes) which were commissioned during 2011.

…despite end of mine life closures…

From 2013 onwards, the outlook for world zinc production will be influenced by the closures of a number of operations and the timing of replacement capacity. Xstrata’s Brunswick (annual capacity of 250000 tonnes) and Perseverance (130000 tonnes) mines in Canada, MMG’s Century mine (500000 tonnes) in Australia, and Vedanta’s Lisheen mine (170000 tonnes) in Ireland, are the major mines scheduled to cease operations as reserves are exhausted. The combined annual capacity of all mines scheduled for closure over the outlook period is around 1.5 million tonnes. In addition, a number of companies are reporting declining ore grades at a number of ageing operations which will result in increased production costs and difficulty in maintaining current production levels.

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Significant expansions to world zinc production capacity that are currently under construction include Blackthorn Resources’ and Glencore International’s Perkoa mine in Burkina Faso (annual capacity of 90000 to 100000 tonnes) and Trevali Mining’s Halfmile Lake mine in Canada (55000 tonnes).

Over the outlook period, five large confirmed projects in the Russian Federation, Mexico, Canada, Burkina Faso, and Australia are projected to commence production adding an extra 740000 tonnes to global capacity. In addition to these developments, a number of smaller projects, amounting to around 370000 tonnes of zinc, are also expected to be completed.

There are some 80 projects currently under consideration across a variety of countries, such as Algeria, Canada, Greenland and Indonesia. Some of these projects have the potential to start up as early as 2013 if regulatory and company approval is received (see Table 1). A number of these projects under consideration are being developed in countries with relatively high levels of sovereign risk. For example, two competing companies claim the right to develop the Mehdiabad project in Iran and each asserts that the Iranian Government has granted them ownership of the deposit.

Table 1: Selected world zinc mine projects under considerationCountry Project Expected capacity (kt)Algeria Oued Amizour 200

Australia Dugald River 200

Kempfield 82.8

McArthur River (phase 3) 200

Woodlawn Retreatment Project 151

Canada Hackett River 250

Howards Pass (Selwyn) 255

Izok Lake 150

Greenland Citronen 95–150

Indonesia Dairi 175

Ireland Pallas green 177

Kazakhstan Shalkiya 120

South Africa Gamsberg 400

Source: Company websites and reports.

Production in China is mainly based at small mines that have an annual capacity of 50000 tonnes or less. These projects are highly responsive to price signals, with the ability to rapidly shutdown or restart operation. For example, after a period of sustained higher world zinc prices at the beginning of 2011, Chinese zinc mine production increased by 56 per cent in March 2011, relative to February 2011. Following an 11 per cent decrease in average monthly prices between September and October in 2011, Chinese mine production growth stalled between October and November.

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Over the outlook period, the share of production from small-scale, flexible, mines is expected to increase with an estimated 175000 tonnes of new capacity to be commissioned. Given that China accounts for around one-third of global zinc production, the ability to rapidly change output has significant implications for world zinc mine supply. In particular, any major changes in world zinc prices over the outlook period could trigger considerable changes in China’s mine production, which, in turn, could affect world prices.

Over the outlook period, the additions to global zinc mine production capacity are expected to more than offset the effect of mine closures and result in an increase in net mine production. Between 2013 and 2017, world zinc production is projected to increase at an average annual rate of 4 per cent to reach 15.8 million tonnes by 2017.

…contributing to increased refined production

Refined zinc production in 2011 is estimated to have increased by 2 per cent relative to 2010 to total 13.1 million tonnes. In 2012 world refined zinc production is forecast to increase by 3 per cent to 13.5 million tonnes. This will be supported by the commencement of production at a number of new smelters, particularly in China, which contributed around 400000 tonnes to global refined capacity in 2011.

Over the outlook period, world refined zinc production is projected to increase at an average annual rate of 3 per cent to total 15.8 million tonnes in 2017. Nine confirmed projects in the Republic of Korea, the US, China, Sweden, Bulgaria, and Italy are expected to contribute approximately 820000 tonnes to global refined zinc capacity over the remainder of the outlook period. Additionally, there are 20 projects currently under consideration which could potentially commence production over the outlook period.

Australian zinc production to grow

In 2011–12, Australia's zinc mine production is forecast to increase by 6 per cent, relative to 2010–11 to total 1.57 million tonnes. The increase in production is underpinned by the expansion of production at Xstrata’s Black Star Open Cut Deeps mine (annual capacity of 120000 tonnes) and commencement of production at Xstrata’s Handle Bar Hill mine (88000 tonnes). The expansion of production at Bass Metal’s Hellyer mine (55000 tonnes) and Kagara’s Vomacka mine (20000 tonnes) commissioned during 2010–11 will also support increased output.

Australian zinc mine production is forecast to increase by a further 4 per cent in 2012–13 to total 1.64 million tonnes. The scheduled expansion of production at Xstrata’s George Fisher Mine and Perilya’s Potosi mine along with the expected commencement of production at CBH Resources’ Rasp mine, will contribute around 190000 tonnes additional capacity to support higher production levels.

Beyond 2012–13, the scheduled closure of Terramin’s Angas mine and MMG’s Century mine will remove around 560000 tonnes of capacity from Australian

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production capacity. However, this will be offset by the scheduled commencement of production at Xstrata’s Lady Loretta mine (annual capacity of 126000 tonnes) and the potential commencement of production at a number of mines currently under consideration, including MMG’s Dugald River mine (200000 tonnes).Combined, these developments could contribute up to 770000 tonnes of capacity to Australian zinc mine production. By 2016–17, Australian zinc mine production is projected to reach 2 million tonnes.

Growth in Australian refined zinc production is expected to be slower than the projected increase in production of concentrates because of capacity constraints. Currently, approximately 540000 tonnes of refined production capacity has been installed in Australia. After rising by 4 per cent in 2011–12 to 521000 tonnes, production is expected to rise by a further 3 per cent to 535000 tonnes in 2012–13. Between 2013–14 and 2016–17, refined zinc production is projected to remain at capacity.

Australian export volumes and values to increase

In 2011–12, export volumes of both zinc ores and concentrates and refined zinc are forecast to increase by 2 per cent, compared with 2010–11, to total 1.5 million tonnes, as a result of increased domestic production. Over the remainder of the outlook period, export volumes are projected to increase at an annual average rate of 5 per cent to reach around 2 million tonnes in 2016–17, supported by the expansion of production at newly commissioned zinc mines and stable domestic consumption (see Figure 5).

Australian export earnings from zinc are expected to decrease by around 8 per cent in 2011–12 relative to 2010-11 to total $2.2 billion, due to forecast lower world prices and an assumed strong Australian dollar. By 2016–17, however, Australian export earnings are projected to reach $2.9 billion (in 2011–12 dollars), a 34 per cent increase in real terms from 2011–12 levels, as a result of projected higher world prices and much larger export volumes.

Figure 5: Australia’s zinc exports


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Table 2: Zinc outlook2010 2011 2012

f2013 f

2014 z

2015 z

2016 z

2017 z

WorldProduction– mine kt 12270 13026 13374 13636 14195 15040 15520 15785– refined kt 12830 13062 13480 13971 14322 14828 15467 15838Consumption kt 12572 12709 13345 13951 14564 15179 15814 16498Closing stocks kt 1562 1915 2050 2070 1828 1478 1131 471

– weeks consumption 6.5 7.8 8.0 7.7 6.5 5.1 3.7 1.5LME price– nominal US$/t 2158 2195 2075 2319 2525 2638 2695 2845

USc/lb 98 100 94 105 115 120 122 129– real b US$/t 2301 2262 2075 2276 2453 2536 2558 2664

USc/lb 104 103 94 103 111 115 116 121

2009–10

2010–11

2011–12 f

2012–13 f

2013–14 z

2014–15 z

2015–16 z

2016–17 z

Australia Mine production kt 1362 1479 1574 1637 1784 2003 1862 2000

Refined production kt 515 499 521 535 540 540 540 540

ExportsOre and conc. c kt 2271 2317 2312 2407 2719 3181 2885 3179

Refined kt 425 410 449 462 467 467 467 467Total metallic content kt 1482 1494 1525 1591 1743 1960 1821 1958

Total value– nominal A$m 2214 2373 2175 2264 2759 3257 3105 3364– real d A$m 2359 2452 2176 2202 2610 2996 2777 2926

b In 2012 US dollars. c Quantities refer to gross weight of all ores and concentrates. d In 2011–12 Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABS; ILZSG; WBMS.

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Resourcesand Energy

QuarterlyReviews

116

A comparison of Australian, OECD and global energy marketsAllison Ball and Kate Penney*

Introduction

Australia’s energy market has some key differences to many other OECD countries. Coal plays a much larger role in Australia’s energy mix, and our energy use is expanding at a faster rate. Renewable energy sources account for a smaller share of Australia's electricity generation than the OECD average. Australia is also one of the few net energy exporters in the OECD and plays an important role in meeting global energy needs.

This review provides some comparisons between the Australian, OECD and world energy markets. It includes recent trends in energy consumption and electricity generation, fuel mixes, energy intensity, energy use per person, energy production, and energy self sufficiency.

All data used in this review were sourced from the International Energy Agency (IEA) 2011 edition of World Energy Balances. There may be some small differences between IEA data for Australia and BREE’s recently published Energy in Australia 2012.

Energy consumption is rising in Australia and globally…

World total primary energy supply (TPES) has increased on average by 2.2 per cent a year over the past decade, to reach 12 150 million tonnes of oil equivalent in 2009. By contrast, TPES in OECD countries declined by 0.1 per cent a year on average between 2000 and 2009. This was mainly driven by a sharp decline of 4.4 per cent in OECD energy demand in 2009 as the global financial crisis took effect, particularly in the US. Prior to the crisis, TPES in the OECD was increasing slowly by 0.4 per cent a year between 2000 and 2008.

Australian TPES rose by 2.2 per cent a year between 2000 and 2009, supported by robust economic and population growth during this period (see Table 1). Australia is the world’s eighteenth largest energy consumer, and accounts for just over 1 per cent of world TPES.

* The views expressed in this review are those of the authors alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.

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Table 1: Energy consumption and the economy, 2009Australia OECD World

GDP (measured at PPP) 2000 US$b 704 32114 64244

Annual growth in GDP, 2000–2009 % 3.0 1.5 3.8

Population million 22 1225 6761Annual growth in population, 2000–2009 % 1.5 0.7 1.2

Total primary energy supply (TPES) Mtoe 131 5238 12150

Annual growth in TPES, 2000–2009 % 2.2 -0.1 2.2Energy intensity (TPES/GDP) toe per ‘000

2000 US$ PPP0.19 0.16 0.19

Annual growth in energy intensity, 2000–2009 % -0.8 -1.6 -1.6Energy use per person (TPES/population) toe 5.9 4.3 1.8Annual growth in energy use per person, 2000–2009 % 0.6 -0.8 0.9

…although energy intensity is falling

Energy intensity—the amount of energy consumed per unit of economic output—has been declining in Australia (by 0.8 per cent a year between 2000 and 2009) and globally over the past decade (see Figure 1). In Australia, this decline can be attributed to two main factors. First, greater efficiency has been achieved through technological improvement and fuel switching. Second, rapid growth has occurred in less energy intensive sectors, such as the commercial and services sector, relative to more moderate growth of the energy intensive manufacturing and processing sectors. Energy intensity in Australia is higher than the OECD average, although equal to the global average.

Figure 1: Energy intensity


Energy consumption per person is higher in Australia

Energy consumption per person in Australia has increased by around 0.6 per cent a year over the period 2000 to 2009. The decline over the same period in the OECD as a whole can be attributed to the effects of the global financial crisis on energy demand.

Australia consumed 5.9 tonnes of oil equivalent of energy per person in 2009, which is higher than the OECD and global average (see Figure 2). This reflects the higher concentration of energy intensive industries in Australia compared with many other OECD countries. More generally, energy consumption per person tends to be higher in countries with higher per person incomes, higher rates of cars and appliances per

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household, greater access to energy, and large industry sectors. Globally, Australia ranks fourteenth on an energy consumption per person basis.

Figure 2: Energy consumption per person


Coal plays a larger role in Australia’s fuel mix…

Oil is the world’s main energy source, currently accounting for around 33 per cent of TPES, followed by coal (27 per cent) and gas (21 per cent). Renewables account for around 13 per cent of world energy consumption, most of which is bioenergy, with much smaller contributions from hydro, geothermal and wind. This fuel mix has been relatively stable over the past decade, apart from a notable increase in the share of coal at the expense of oil. The use of oil, gas and nuclear power is higher in OECD countries than the global average, with lower contributions from coal and bioenergy.

Coal plays a more significant role in Australia’s energy mix than in other OECD countries and world energy markets, accounting for more than 40 per cent of Australia’s TPES (see Figure 3). Australia’s dependence on oil is similar to the world average, while the penetration of gas is similar to that of the OECD and world average, as is that of wind and solar. The use of hydro energy and bioenergy is significantly lower in Australia than in the world energy market. In Australia, the fastest growing energy sources over the past decade have been gas, wind and solar (see Figure 4).

Figure 3: Fuel mix in primary energy supply, 2009


Figure 4: Annual growth in primary energy supply, 2000–2009


...and industry and transport play a larger role in total final energy demand

The transport and industry sectors are the largest users of final energy in Australia, accounting for more than two-thirds of total final energy consumption in 2009. The transport sector is also the largest user of final energy in the OECD. Compared with Australia, the residential sector accounts for a greater proportion of final energy use in the OECD and globally (see Figure 5).

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Figure 5: Final energy consumption by sector, 2009


Wind and gas fired electricity generation is growing in Australia and globally…

World gross electricity generation has increased by 3 per cent a year since 2000, to reach 20055 TWh in 2009. Coal and gas were the largest sources of global electricity generation in 2009, accounting for 40 per cent and 21 per cent, respectively. Nuclear power comprised 13 per cent of world and 22 per cent of OECD electricity generation. Renewables contributed around 19 per cent of global electricity generation, most of which is hydro energy (see Figure 6).

Australia relies more heavily on coal for electricity generation than the world and OECD, while in the OECD the balance of base load power generation is largely made up by nuclear and hydro energy. Around three-quarters of Australia’s electricity is generated using coal, reflecting the relatively low cost of coal in Australia and the abundance of coal reserves along the eastern seaboard where the majority of the electricity is consumed and generated.

The use of gas-fired electricity in Australia is lower than both the world and OECD average, although its uptake in Australia has increased at a faster rate over the past decade (see Figure 7). The share of wind and solar powered electricity in Australia is slightly higher than the world average.

Figure 6: Fuel mix in electricity generation, 2009


Figure 7: Annual growth in electricity generation, 2000–2009


…although the role of renewables is smaller in Australia

The uptake of renewable energy technologies is expanding, both in Australia and globally, by around 1.5 per cent and 2.3 per cent respectively between 2000 and 2009. However, growth in renewable energy consumption in Australia over the past decade was constrained by the drought and the associated decline in the use of hydro power.

The share of renewables in electricity generation in Australia (around 7 per cent in 2009) is significantly lower than the OECD (17 per cent) and global (19 per cent) average (see Table 2). Hydro accounts for a much larger share of OECD and global electricity generation than in Australia, with bioenergy also playing a greater role.

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Table 2: The role of renewables, 2009Australia OECD World

Renewables consumption (TPES) Mtoe 7.3 391.5 1592.8

Renewables share of TPES % 5.6 7.5 13.1

Annual growth in renewables consumption, 2000–2009 % 1.5 2.4 2.3

Renewables electricity generation TWh 19.1 1809.7 3861.1

Renewables share of electricity generation % 7.3 17.4 19.3

Annual growth in renewables generation, 2000–2009 % 0.9 2.0 3.5

Energy production is increasing at a faster rate in Australia…

Energy resources are widely dispersed around the world. Some countries are well endowed with a single or multiple energy resources (such as the US, China, the Russian Federation, Canada and Australia), while others have limited domestic resources (such as Japan and the Republic of Korea).

World energy production increased at an average annual rate of 2.3 per cent between 2000 and 2009, while energy production in OECD countries declined by 0.1 per cent a year (see Figure 8). By contrast, Australia’s energy production increased by 3.2 per cent a year over the same period, supported by the development of new coal and gas production capacity. As a result, Australia is the world’s ninth largest energy producer, accounting for around 2.5 per cent of total world energy production.

Figure 8: Annual growth in energy production, 2000–2009


…and we can produce most of our energy needs

Production self sufficiency provides an indication of a country’s ability to meet its own energy needs. Between 2000 and 2009, Australia’s energy production was, on average, sufficient to meet 2.3 times its energy requirements. Over the same period, OECD energy production could only meet around 70 per cent of its members energy needs. The higher self sufficiency ratio for Australia reflects the abundance of energy resources, and Australia’s relatively lower energy consumption levels compared with other major OECD countries.

Given its rich resource endowment, Australia is a major energy exporter and its energy resources plays an important role in meeting regional and global energy needs. Australia is the world's largest exporter of coal, one of the largest uranium exporters, and is ranked fourth in terms of LNG exports. Australia exports more than two-thirds of its energy production, compared with OECD economies which export 37 per cent of production.

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But like other OECD countries, Australia is a net importer of oil…

While Australia is more than self sufficient at an aggregate level, it is a net importer of crude oil and refined petroleum products. In line with declining production and growing consumption, Australia’s oil import dependency has been increasing. However, Australia still exports large quantities of oil relative to its level of consumption. This reflects, in part, the location of Australia’s crude oil resources and refining capacity. Australia has links to well-established and proven supply chains so increasing import dependency does not necessarily have implications for energy security.

…and Australia’s dependence on oil is growing…

In general, the share of oil in TPES has been declining globally, supported by policies to reduce oil dependence (see Figure 9). However, the share of oil in TPES has been increasing in Australia over the last few years supported by strong economic growth, including demand for petroleum products in the energy and resources sectors.

Figure 9: Oil as a share of energy consumption


…as is Australian dependence on gas

Gas now accounts for around 22 per cent of Australia’s TPES. The share of gas in the Australian energy mix has been increasing rapidly over the past few decades, driven by environmental concerns, access to large gas resources and ease of use. Gas use in the OECD and world has increased steadily, but at a much slower pace (see Figure 10). With its large gas resources, Australia’s gas production has exceeded domestic requirements, with the surplus exported to meet growing demand in Asia. The OECD meets around three-quarters of its gas needs through domestic production. This is supported by the output of large gas producers including the US, Norway and Canada.

Figure 10: Gas as a share of energy consumption


Conclusions

Many of the recent trends in Australia’s energy market are also occurring in other OECD countries and globally. This includes growing energy demand but declining energy intensity, and the expansion of gas and wind for electricity generation. But there are also some key differences—most notably the role of coal in meeting Australia’s energy demands, a smaller share of renewables in our energy mix, as well as Australia’s position as a net energy exporter.

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Australia's LNG industry – a SWOT analysisAlan Copeland*

Over the next five years, the Australian liquefied natural gas (LNG) industry will undergo a fundamental change that will result in production capacity increasing four fold. In 2016–17, Australia’s LNG export volumes are projected to increase to 63 million tonnes, rising from 20 million tonnes in 2010–11. The value of LNG exports in 2016–17 is projected to reach $26 billion (in 2011–12 dollars) compared with a value of $11 billion in 2010–11.

Currently, there are two LNG projects operating in Australia, the North West Shelf and Darwin LNG which have a combined production capacity of around 20 million tonnes a year. By the end of this decade, Australia’s LNG export capacity is expected to exceed 80 million tonnes a year, which could allow it to be the world’s largest LNG exporter. This expansion of capacity is based on 8 projects which are under construction including: Gorgon, Wheatstone, Pluto, Ichthys, Prelude, Queensland Curtis LNG, Australia Pacific LNG and Gladstone LNG. The Pluto project is scheduled to export its first LNG in March 2012. The scale of the LNG expansion in Australia is embodied by the following statistic: around 70 per cent of the world’s LNG capacity currently under construction is located in Australia (see Figure 1).

Figure 1: LNG capacity, existing and under construction


Using a strengths, weakness, opportunities and threats (SWOT) analysis as a framework, this review aims to assess what has led to the rapid expansion of Australia’s LNG industry and what the prospects are for future expansions.

Strengths

Extensive gas reserves, low sovereign risk, established reputation and geographical location relative to other potential LNG exporters can explain why Australia accounts for such a significant proportion of the world’s LNG capacity that is under construction. Australia’s LNG projects are based on large reserves of gas which are capable of supporting LNG production over a period of 40 to 50 years. Furthermore, economic demonstrated gas reserves in Australia have been increasing over the past decade following a number of successful exploration campaigns. These reserves are far greater than what could potentially be consumed domestically and, hence, companies are preparing to export gas (in the form of LNG) to monetise the reserves.

Australia enjoys a stable system of government, high levels of personal security, well-established property rights, and consistent fiscal and regulatory frameworks that encourage foreign investment. These factors provide projects in Australia with a * The views expressed in this review are those of the author alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.

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lower level of sovereign risk relative to competing projects in Western and Northern Africa, Latin America and the Russian Federation. Nationalisation of oil projects or forced changes in ownership in some of these countries have created uncertainty for companies, which in turn makes it less attractive for them to invest in these nations.

Over a period of nearly 25 years, Australia has earned a reputation for being a reliable supplier of LNG. Given that a large part of Australia’s LNG exports are used for electricity generation in Japan, reliability of supply is critical. This reputation has resulted in Japan continuing to increase LNG import volumes from Australia. It has also promoted access to new markets over the past decade including China and the Republic of Korea. An important factor in maintaining reliable supply of LNG is ensuring that Australia’s two LNG plants are well operated and maintained, and have well trained, skilled and safety-focussed work forces. The availability of skilled workers with an engrained safety focus contributes to the attractiveness of developing projects in Australia. While a shortage of skills has been identified as a risk, the Australian Government has instituted the Enterprise Migration Agreement that allows for skilled workers to be brought in from overseas if local labour is not available.

Geographically, Australia is well placed to supply the large existing markets of Japan and the Republic of Korea as well as the emerging Chinese market. Located in the northern parts of Australia, LNG facilities are generally a little over one week shipping time away from north-east Asia. The benefits of the short distance, relative to exporters located in the Middle East or in the Atlantic Basin are two fold. First, the shorter shipping distance (and time) reduces costs associated with fuel and crew costs. Second, it reduces the impact of ‘boil off’ where the gas content of LNG decreases over time as a result of being pressurised.

Weaknesses

The main weakness for Australia’s LNG sector is that it has relatively high construction costs. For example, the Gorgon, Pluto and Wheatstone projects all have a capital cost of $3 billion per million tonne of annual capacity, while the Ichthys project has a cost approaching $4 billion per million tonne of annual capacity. However, the cost intensity of these projects may decrease if additional trains are added as is planned at Gorgon, Pluto and Wheatstone. By comparison, the PNG LNG project in Papua New Guinea has a capital cost of US$2.3 billion per million tonne of annual capacity, while the soon to be completed project Angola LNG project in northern Africa had a cost of below US$1.7 billion per million tonne of annual capacity.

While the high cost of projects currently under construction in Australia partly reflects industry wide project inflation over the past few years, Australia is regarded as a high cost project environment. The high costs are a reflection of high labour costs and the strict conditions state and federal governments place on projects to ensure that the projects are sensitive to environmental and community concerns.

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The location of some of Australia’s LNG projects also contributes to high costs. Projects located in northern Western Australia are a significant distance from population centres and project proponents are required to pay workers higher wages to attract them from other parts of the country. LNG projects in the Pilbara (Western Australia) and Gladstone (Queensland) are competing for labour with the iron ore and coal industries, which are also undertaking projects to expand capacity. The distance from major population centres also increases transport costs for domestically manufactured products, such as construction materials, and internationally manufactured project-specific components.

Opportunities

Significant opportunities may present themselves for the expansion of the Australian LNG industry beyond projects currently under construction. These opportunities are largely based on the potential increases in Asian LNG import demand and expansions of capacity based on additional LNG trains being built at existing sites.

World gas consumption and LNG imports are projected to increase over the next 25 years, particularly into China. The International Energy Agency (IEA) projects that China’s gas consumption will increase from 10 billion cubic metres in 2009 to 125 billion cubic metres in 2020, and 210 billion cubic metres in 2035. While pipeline imports and domestic production will account for some of this growth, China’s LNG imports will increase, providing an opportunity for further exports from Australia. Strong growth in Indian and OECD Asian (Japan and the Republic of Korea) gas imports are also projected, some of which will be reliant on LNG imports.

Further expansions to Australia’s LNG production capacity are expected to come from existing projects where land has been set aside for additional trains. This includes Curtis Island, Wheatstone, Gorgon, Pluto and Ichthys. The expansions of these brownfield projects will be more cost effective than the initial greenfield developments as many of the approvals are already in place, which increases the attractiveness of further investment in additional capacity in Australia.

Over the next five years, as project construction progresses, a significant workforce will be skilled and trained. Companies, the Australian and state governments are implementing a number of programs to ensure there are sufficient numbers of skilled workers available. If LNG project proponents sought to further increase capacity, they would be able to benefit from utilising an existing and well trained workforce.

Threats

The largest threat to the Australian LNG sector in terms of both export competition and price is from shale gas, either in the form of LNG exports from North America or the development of large domestic reserves in countries to which Australia is a major exporter, such as China. Currently the US exports LNG; however this is based on excess LNG imports which are surplus to domestic requirements. At present there are two LNG projects in the US which have regulatory approval to export LNG using

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shale gas as a feedstock. One of these projects, Cheniere Energy’s Sabine Pass, has signed offtake agreements with BG Group and Kogas. There are also a number of other shale gas LNG export projects for which approval is being sought.

Despite being distant from the growing Asian market, LNG exports from the US may be price competitive with other suppliers into Asia because of the low cost of feed gas and relatively low capital costs for construction of liquefaction facilities. At present, US domestic gas priced at the Henry Hub is trading below US$3 per MMbtu. This is the price that a liquefaction facility such as Sabine Pass would pay for feedstock. Even allowing for liquefaction and transport costs, US LNG exports at this domestic price would be highly profitable given the current Japanese import price of around US$16–17 per MMbtu. This price differential provides a significant incentive for US shale gas to be liquefied and exported into Asian markets.

Canada is also likely to become an LNG exporter over the medium term. Gas production in Canada has been affected by low prices in the US, where a significant proportion is sold. Canadian gas producers are also investigating the feasibility of piping gas to their west coast for export into the Asian market.

There are significant gas reserves located off the coast of west and east Africa and in Russia and the Middle East. The development of the reserves to support LNG production and exports could also represent a threat to future Australian exports. While these countries/regions have significant export potential, they are likely to be realised in the long term rather than in the immediate future.

Capital costs of constructing a liquefaction plant in the US are expected to be lower than in Australia. Liquefaction plants which are located along the Gulf Coast will be located among oil refineries and other heavy industries where companies can take advantages of existing infrastructure (i.e. pipelines), availability of skilled labour and support industries. Potential new liquefaction plants could be based on existing LNG import terminals, where there is an existing land footprint, and infrastructure such as pipeline networks and storage facilities.

Unconventional gas (including shale and coal seam gas) developments in China also present a threat to further growth of the Australian LNG export market. China is targeting a significant increase in gas consumption over the medium and long term. In order to meet increased gas consumption in the medium term, it will import gas via pipeline from central and south eastern Asia, import LNG (including from Australia) and develop domestic natural gas fields. However, over the long term, there is the potential for unconventional gas to become a source of domestic gas supply. At present, the unconventional gas industry in China is in its infancy. Significant exploration activity is currently being undertaken to understand the size and nature of reserves. Even if exploration is successful and unconventional gas reserves similar to those in the US are found, a sizable amount of infrastructure will need to be built to enable gas to be transported from production sites to consumption centres. China's unconventional gas production is unlikely to be significant until the end of the decade. However, if over the next decade unconventional gas emerges as a significant source of gas supply within China, it

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could reduce the likelihood of further large scale LNG capacity expansions in Australia.

The future

Australia is an attractive destination for investment in LNG capacity. Of the global LNG capacity currently under construction, around 70 per cent is located in Australia. Australia's appeal as an investment destination lies in the extensive nature of its gas reserves, low sovereign risk, reliable reputation and geographic location. However, Australia's LNG industry is still likely to face a number of challenges. Projects are subject to high costs and are many are situated in remote locations, although these challenges can be overcome with careful project planning and aided by an environment with low levels of sovereign risk. Significant opportunities exist for further growth in the industry, supported by growth in LNG import demand in Asia over the next 25 years. However, there remains uncertainty ass to what role unconventional gas will play in meeting increased gas demand in Asia.

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A short history of uraniumJohn Barber, Alan Copeland and George Stanwix*

Australia is one of the largest suppliers in the world uranium market and has a leading role in ensuring the sustainable development and continued responsible use of this important energy resource. Australia contains the world's largest uranium reserves and is currently the third largest producer. Uranium is expected to be an important fuel for electricity generation over the next 25 years underpinned by consumption in China and India.

This review provides a historical overview of the Australian uranium industry and how key events in the world nuclear energy industry have affected it. Three periods are examined which are characterised by different rates of growth in reactor numbers and uranium consumption. These include: one, the start up and rapid growth period from 1900 to 1978; two, a period of weaker growth from 1979 to 1995; and three the nuclear ‘renaissance’ that has been underway since 1996. Concluding comments are presented on the outlook for uranium consumption, particularly in the wake of the Fukushima Daiichi disaster in Japan in early 2011.

The main use for uranium is in electricity generation. Nuclear power plants use steam driven turbines to generate electricity in the same way as coal- and gas-fired plants, but use a different heat source. Nuclear power plants use the heat generated from the fission of uranium atoms to create steam whereas other power plants burn coal or gas. Nuclear power currently produces around 14 per cent of the worlds electricity and consumes around 65000 tonnes of uranium a year. An advantage of nuclear power is that it produces minimal greenhouse gas emissions and requires much smaller quantities of fuel, by weight, relative to fossil electricity plants.

The beginnings of nuclear power (1900–1978)

Around the start of the twentieth century, small scale dedicated uranium mining commenced at a number of sites around the world particularly in Africa and Eastern Europe. Radium Hill in South Australia became Australia’s first uranium mine in 1906. In these early days uranium was valued more for its use in the production of radium than in terms of its energy properties. The price of Radium in 1911 was equivalent to $1.7 million per gram (in 2010 dollars).

During World War II uranium was used in nuclear applications and for weapons purposes. Though nuclear weapons production escalated considerably after World War II, peaceful applications for nuclear energy, such as electricity generation, were also developed in the 1940s and 1950s. In 1956 the UK opened Calder Hall 1, the first commercial nuclear power plant. Four years later the US opened its first commercial nuclear power plant, Dresden 1. The next two decades saw a rapid expansion in the number of nuclear reactors with 214 opening around the world by the end of 1979.

* The views expressed in this review are those of the authors alone and are not necessarily those of the Bureau of Resources and Energy Economics nor the Department of Resources, Energy and Tourism.

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The relatively cheap cost of electricity from nuclear reactors was highly appealing in the 1970s with energy consumers feeling the effect of oil price shocks.

The strong growth in nuclear power plants saw a corresponding increase in the demand for uranium in the 1970s, from 1968 to 1979 world uranium consumption increased by over 900 per cent to 27 200 tonnes. To supply this market a number of new mines were commissioned around the world, predominantly in Africa, Canada, Australia and the US. Though its ore grades were considerably lower, policies to promote nuclear self sufficiency lead to the US being the largest uranium producer over this time period.

Uranium production in Australia re-commenced in the 1950s to meet demand for uranium in the US and UK. Radium Hill re-opened in 1954 and new mines opened such as Rum Jungle in the Northern Territory and Mary Kathleen in Queensland. However, production from these mines ended in the 1960s as their ore bodies were exhausted or their contract for supply expired.

The large increases in world uranium demand in the 1970s led to renewed exploration efforts that resulted in the discoveries of uranium deposits in Australia at Ranger, Roxby Downs, Nabarlek, Koongarra and Jabiluka. It would take nearly 10 years for these mining operations to commence at these locations with the Australian Government commissioning a number of inquiries to inform its policy on the mining and exporting of uranium. Over this time the world uranium price increased rapidly, from around $33 per pound (in 2012 dollars) in 1972 to around $160 in 1977. By the early 1980's the uranium price had fallen to just $50 per pound.

The declining growth period (1979–1995)

Some energy analysts in the 1970s estimated that in the US alone nuclear electricity generations capacity would increase to over 2000 Gigawatts electric by the year 2000. However, by 2010, nuclear electricity generation capacity in the US had reached only 100 Gigawatts because of two incidents between 1979 and 1986. Public safety concerns and changing attitudes towards nuclear energy following reactor malfunctions, at Three Mile Island in 1979 and then Chernobyl in 1986 dramatically changed the growth trajectory of nuclear power generation.

On 28 March 1979 a malfunction in the cooling system of reactor two of the Three Mile Island power station caused a partial meltdown that resulted in a minor radiation leak from the power plant. Measurements at the time of the incident indicated that the radiation released was not considered to be at harmful levels, and this was confirmed in subsequent inquiries. While there was considerable damage to the internal reactor, the containment building worked as intended and prevented any damaged fuel from being released. By the end of the incident not a single person had died and within 18 years the Pennsylvania health authorities had not found any evidence of unusual health trends, such as higher cancer rates, in the area. Nevertheless, the incident generated a large amount of fear about nuclear power in the US and other parts of the world.

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The perception of Three Mile Island changed public confidence in the safety and reliability of nuclear energy. As a result, the US Government introduced new safety regulations that led to the delayed start up of a number of power plants that were already under construction, and also stopped issuing new licences. Between 1979 and 2011 there were no new approvals to build reactors in the US. All reactors that started operation after Three Mile Island had received their approvals prior to 1979 (see Figure 1).

Figure 1: US nuclear reactor construction and start up


In 1979 and 1980 uranium consumption dropped in response to the pause in US reactor start ups. In the two years following the Three Mile Island incident, the uranium price plummeted from $130 per pound at the time of the incident to $60 per pound (in 2012 dollars) two years later. In 1981 world uranium production peaked at around 44000 tonnes, however by 1983 it had fallen by 16 per cent to 37000 tonnes. Lower demand and a falling uranium price saw a number of mines reduce their output levels or even close down.

On 26 April, 1986 a series of operator errors and equipment malfunctions during systems testing caused a meltdown in unit 4 of the Chernobyl nuclear power plant in the Ukraine (part of the USSR at the time). Unlike Three Mile Island, two explosions exposed the core, releasing radioactive material into the atmosphere and radiation related fatalities occurred for the first time in the history of commercial nuclear power. The events of Chernobyl were magnified by the effects of the radiation being spread across Europe by prevailing winds and concerns over whether the Soviet Union was disclosing sufficient and accurate information about the disaster.

In the five years prior to Chernobyl, the number of nuclear reactor start ups had increased, particularly in France, and with the completion of reactors in the US that had been postponed following the Three Mile Island incident. As shown in Figure 2, the number of reactors that opened dropped rapidly after 1986 and is attributable to a large decrease in investment in nuclear power in Western Europe and the US following widespread public fear over the safety of nuclear power.

Figure 2: World nuclear reactor start ups


As a result of Chernobyl, the uranium market entered a slump in the late 1980s and early 1990s. Uranium demand decreased as a result of a slowdown in reactor start ups and there was an increase in supply of secondary uranium from decommissioned nuclear weapons and re-processed nuclear fuel. In 2012 dollars, the world uranium price decreased from an average of US$36 a pound in 1986 to US$19 a pound in 1989 and then US$14 a pound in 1992 (see Figure 3). The decrease in prices during

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this period resulted in a decrease in world production, from around 37000 tonnes in 1986 to 23 500 tonnes in 1993.

Figure 3: World uranium production and price


Developments in world uranium production had major impacts on the Australian uranium mining industry. In 1984 the newly elected Australian Government led by Prime Minister Hawke implemented a ‘three mine policy’ to limit the production of uranium. The three locations with approval to operate were Nabarlek, and Ranger in the Northern Territory and Olympic Dam in South Australia. At the time, Nabarlek had ceased production and Olympic Dam was not scheduled to start operation until the late 1980's. Australia's uranium production reached 4400 tonnes in 1982 and then subsequently fluctuated between 2000 and 4000 tonnes a year between 1983 and 1995. With world uranium prices averaging around US$16 a pound (in 2012 dollars) between 1989 and 1994, there was very little incentive to increased production. As a result it was not until 1996 that Australia's uranium production exceeded levels achieved in 1982 (see Figure 4).

Figure 4: Australian uranium production


The nuclear ‘renaissance’ (1996–present)

Over the past 15 years, there has been a significant increase in uranium consumption which has largely been underpinned by the start up of new reactors in Asia and Eastern Europe.

The growth in world uranium consumption since 1996 was driven largely by nuclear reactor start ups in non OECD economies including China, India and throughout Eastern Europe. Between 1996 and 2011 over 40 new reactors opened in Asia (see Figure 5), which represented 70 per cent of all new nuclear reactor start ups over this period. The increase in nuclear electricity generation capacity in Asia over the past 15 years is due to strong growth in electricity demand, moves to cleaner base load electricity fuels, and in the case of China and India, diversification away from a heavy dependence on coal.

Figure 5: Reactors start ups in Asia


While uranium consumption increased strongly between 1996 and 2011, production growth remained week until around 2002. Until then, a large proportion of increased

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demand was sated with supplies from secondary sources, particularly decommissioned nuclear weapons from the Russian Federation. By 2002, concerns within the market began to emerge about the adequacy of uranium production given expectations of robust growth in consumption associated with new reactor start ups. From 2002 onwards, there has been strong growth in production from Kazakhstan following the start up of a number of mines.

During the period 1996–2011, uranium prices peaked in 2007 at US$111 a pound (in 2012 dollars), a ten-fold increase from the price in 2001. The particularly sharp increase in price in 2005 and 2006 (see Figure 6) reflected flooding at the Cigar Lake mine in Canada during its construction phase. The mine, which is now scheduled to re-commence operations in 2014, will be one of the world's largest operations with a uranium production capacity of 4000 tonnes a year.

The decrease in uranium prices over the past three years is a reflection of weaker demand associated with the initial effects of the global financial crisis of 2008–09 and a rapid increase in Kazakhstan's production. Between 2005 and 2009, 15 uranium mines were opened in Kazakhstan resulting in its production increasing from 4400 tonnes in 2005 to almost 18000 tonnes in 2010. Kazakhstan is currently the largest uranium producer in the world.

Figure 6: Annual uranium prices


In Australia, changes to both state and federal government policies on uranium mining and exports after 1996 and a higher uranium price have led to renewed interest in uranium mining. In South Australia, Heathgate Resources’ Beverley mine in South Australia commenced operations in 2000 and UraniumOne’s Honeymoon mine commenced initial production in late 2011. However, over the past three years, growth in Australia's uranium production has been below maximum capacity. A mechanical failure in a shaft at Olympic Dam led to lower production in 2009 and 2010 while production at Ranger as been affected by heavy rainfall in 2010 and again in 2011.

The future of nuclear power and the outlook for uranium

On 11 March 2011 a 9.0 magnitude earthquake off of the east coast of Japan caused a 15m tsunami that resulted in tremendous damage and loss of life in the eastern prefectures on Japan’s Honshu island. Among the damaged buildings was the Fukushima Daiichi power plant, where the tsunami disabled the power supply and cooling systems. Subsequent overheating led to a core meltdown in three reactors and a hydrogen explosion that damaged a fourth reactor that resulted in the release of radioactive materials into the surrounding air and water. At the time, Japan was the world’s third largest producer of nuclear power and consumer of uranium with over 50 reactors in operation. In response to the accident, and growing public concern over the safety of nuclear energy, the Japanese Government ordered all

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nuclear reactors to undergo stress tests during the next scheduled maintenance window. If the government does not approve the restart of any of its nuclear reactors by May 2012, all of Japan's nuclear reactors will be offline.

The impact of the Fukushima Daiichi accident was felt almost immediately in the uranium market. The uranium price dropped by 30 per cent between March and August 2011 in response to a number of countries suspending the construction of nuclear power plants. Following the Fukushima Daiichi incident, Germany revised its energy policy and announced the planned closure of eight nuclear reactors.

While in the short to medium term some of Japan’s shutdown reactors are expected to restart, it is less clear what role nuclear power will have in Japanese energy policy over the long term. Prior to the Fukushima incident, new nuclear power stations were scheduled to be built over the next decade. At the very least, it is likely that construction on these projects will be significantly delayed.

On a global level, the Fukushima incident is unlikely to prevent further growth in uranium consumption. Prior to the accident, much of the growth was expected to occur in China and India. Both of these countries have since their reaffirmed their commitments to nuclear power. In its New Policies Scenario, the International Energy Agency (IEA) projects that China's nuclear power generation will increase from 70 Terrawatt hours in 2009 to 956 Terrawatt hours in 2035. To support this increase in output, nuclear electricity generation capacity is projected to increase from 39 to 125 Gigawatts electric. India's nuclear power industry is also projected to increase rapidly. The IEA projects India's nuclear generation to increase from 19 Terrawatt hours in 2009 to 184 Terrawatt hours in 2035. Both India and China are pursuing growth in nuclear generation capacity as a means to meet growing electricity demand and also to reduce the emissions intensity of their respective economies.

Increases in nuclear power generation in India and China will be accompanied by growth in nuclear power generating capacity in the Republic of Korea, the Russian Federation and Eastern European countries, such as the Ukraine, Bulgaria, Slovakia and Romania. In addition, other countries, such as Vietnam and the United Arab Emirates, are expected to develop a nuclear power industry.

The projected increases in nuclear energy production are likely to see strong growth in the demand for uranium. Australia, as the world's largest holder of uranium reserves and the world's third largest uranium producer, has the opportunity to play an expanded role in the uranium market. In particular, there are several large uranium deposits scheduled to be developed over the medium term, most notably Olympic Dam, currently the largest uranium deposit in the world.

Government policy, at both the federal and state level, will continue to have an important role in determining the future of Australia’s uranium industry. Recent announcements, such as the Federal Government’s proposal to permit uranium exports to India and the government of New South Wales’ intention to allow uranium exploration, indicate support for the expansion of the uranium industry.

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Australia's uranium production and exports are projected to increase to 13700 tonnes in 2016–17 from a forecast 7000 tonnes in 2011–12. Further details on the outlook to 2017 for world and Australian uranium production, consumption and prices are available in the uranium note.

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Resourcesand Energy

QuarterlyStatistical tables

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Contribution to GDP


Principle markets for Australian exports in 2010–11 dollars


Principle markets for Australian resources and energy exports


Table 1: Annual exports summary, Australia, Balance of payments basis2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 f$m $m $m $m $m $m

At current prices Resources and energyCoal, coke and briquettes 21928 24603 54954 36777 44099 49284

Other fuels 15641 18889 20706 18964 23619 25869Metalliferous ores and other minerals a s 36137 41930 52733 54082 79765 88462

Gold 10740 12272 17508 14300 14256 18906Other metals b s 21773 18211 14358 14031 15963 14974

Total s 106220 115904 160259 138154 177703 197494

Total commodities sector s 136619 145875 194176 168630 212069 233151

Other merchandise s 33001 37047 37447 33121 34884 na

Total merchandise s 169620 182922 231623 201751 246953 na

Services 47175 50891 52948 52011 50546 na

Total goods and services 216795 233813 284571 253762 297499 na

Chain volume measures cResources and energyCoal, coke and briquettes 27855 29585 30951 36777 35277 37433

Other fuels 16680 16568 17523 18964 20048 20268Metalliferous ores and other minerals as 43588 47367 46991 53994 55572 62723

Gold 16001 16500 18348 14300 12767 14141Other metals bs 14107 13907 14358 13668 14356 15227

Total s 118231 123928 128171 137703 138020 149793

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2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 f$m $m $m $m $m $m

Total commodities sector s 149918 153155 159801 169473 170972 188829

Other merchandise s 28256 31088 28175 32277 33855 na

Total merchandise s 178174 184243 187976 201750 204827 na

Services 51135 53651 54023 52011 49540 na

Total goods and services 228443 236965 241051 253761 254367 na

a Includes diamonds, which are not included in the balance of payments item by the ABS. b Includes BREE estimates for steel and nickel, which are retained as confidential by the ABS. c For a description of chain volume measures, see ABS, Introduction of chain volume measures, in the Australian National Accounts, cat. no. 5248.0, Canberra. Reference year is 2009–10. s BREE estimate. f BREE forecast. na Not available.Sources: BREE; ABARES; Australian Bureau of Statistics, Balance of Payments and International Investment Position, Australia, cat. no. 5302.0, Canberra.

Table 2: Unit export returnsAnnual indexes a 2005–

062006–07

2007–08

2008–09

2009–10

2010–11

2011–12 f

Metals and other minerals 161.9 201.5 199.8 225.8 210.3 281.2 265.6

Energy 226.0 206.6 235.8 398.3 258.9 317.0 338.4Total resources and energy 186.7 204.3 214.3 290.6 229.3 295.5 293.4

a In Australian dollars. Base: 1989–90 = 100. s BREE estimate. f BREE forecast.Sources: BREE; ABARES.

Table 3: Contribution to exports by sector, balance of payments basis


Table 4: Industry gross value added a bunit 2006–07 2007–08 2008–09 2009–10 2010–11

Agriculture, forestry and fishing $m 23138 24742 29109 28764 30854

Miningmining (excludes services to mining) $m 78935 79923 82209 87796 88243exploration and mining support services $m 7783 8632 8656 8309 9171total $m 86446 88193 90508 96106 97413

Manufacturingfood, beverage and tobacco product $m 23160 23127 22404 23953 23576textile, clothing and other manufacturing $m 9262 9695 8688 7150 6647wood and paper products $m 8400 8071 7457 7736 7567printing and recorded media $m 5048 5174 4268 4088 4101petroleum, coal, chemical, etc, product $m 18652 19114 17200 17807 17907

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unit 2006–07 2007–08 2008–09 2009–10 2010–11non-metallic mineral products $m 5673 5926 5890 5783 5608metal products $m 20408 22719 21993 21310 22673machinery and equipment $m 19257 19884 18760 19881 19552total $m 108703 113062 106363 107707 107633

Construction $m 86469 92517 95291 95804 101793Electricity, gas, water and waste services $m 26798 26866 27894 28623 28893Taxes less subsidies on products $m 89888 91668 90827 90335 91106

Statistical discrepancy $m 1 1 0 0 –4741

Gross domestic product $m 1201563 1246899 1263934 1293380 1318960

a Chain volume measures, reference year is 2009–10. b ANZSIC 2006.Source: Australian Bureau of Statistics, Australian National Accounts: National Income, Expenditure and Product, cat. no. 5206.0, Canberra.

Table 5: Volume of production indexes2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 f

Mine aEnergy 118.2 116.9 122.6 125.5 121.8 130.6Metals and other minerals 124.3 124.1 119.6 123.2 138.8 146.6

Total resources and energy 121.1 120.4 121.1 124.4 130.3 138.6

a Uranium is included with energy. s BREE estimate. f BREE forecast.Note: The indexes for the different groups of commodities are calculated on a chained weight basis using Fisher’s ideal index with a reference year of 1997–98 = 100.Sources: BREE; ABARES; Australian Bureau of Statistics.

Table 6: Employment, Australia a b2005–06 2006–07 2007–08 2008–09 2009–10 2010–11’000 ’000 ’000 ’000 ’000 ’000

Agriculture, forestry and fishing 348 352 355 362 369 351

Miningcoal 29 27 26 35 41 48oil and gas extraction 9 10 11 15 15 13metal ore 42 46 47 49 52 69other mining (including services) 49 53 62 72 66 75

total 129 136 146 170 173 205

Manufacturing food, beverages and tobacco 205 215 230 226 228 229

textiles, clothing, footwear and leather 56 51 50 48 46 45

wood and paper product 77 77 70 67 64 57printing, publishing and recorded media 52 51 54 51 52 56

petroleum, coal and chemical product 88 92 98 90 88 85

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2005–06 2006–07 2007–08 2008–09 2009–10 2010–11’000 ’000 ’000 ’000 ’000 ’000

non-metallic mineral product 38 36 42 40 37 37metal product 161 161 159 157 147 147other manufacturing 347 342 360 348 343 336total 1025 1025 1063 1028 1006 992

Other industries 8587 8876 9144 9332 9479 9806

Total 10089 10388 10708 10892 11027 11355

a Average employment over four quarters. b ANZSIC 2006. Caution should be used when using employment statistics at the ANZSIC subdivision and group levels due to estimates that may be subject to sampling variability and standard errors too high for most practical purposes.Source: Australian Bureau of Statistics, Labour Force, Australia, cat. no. 6291.0, Canberra.

Table 7: Business income, Australia2006–07 2007–08 2008–09 2009–10 2010–11$m $m $m $m $m

Company profits in selected industries aMining 40311 40184 67402 49889 76563

Manufacturingfood, beverages and tobacco 4532 5757 6166 8168 natextiles, clothing, footwear and leather 548 501 245 409 na

wood and paper product 1085 1184 667 615 naprinting, publishing and recorded media 578 620 170 439 na

petroleum, coal and chemical product 3859 6192 2159 3676 na

non-metallic mineral product 1108 1359 978 1155 nametal product 10004 7924 3781 2662 namachinery and equipment 1640 1937 2695 3383 naother manufacturing 762 851 637 712 natotal 24116 26325 17498 21219 20344

Other industries (including services) 88856 99836 73102 98834 103016

Total (including services) 153283 166345 158002 169942 199923

a Company profits before income tax, based on ANZSIC 2006.Sources: BREE; Australian Bureau of Statistics, Australian National Accounts: National Income, Expenditure and Product, cat. no. 5206.0, Canberra; Australian Bureau of Statistics, Company Profits, Australia, cat. no. 5651.0, Canberra; Australian Bureau of Statistics, Business Indicators, Australia, cat. no. 5676.0, Canberra; Australian Bureau of Statistics, Australian Industry, cat. no. 8155.0, Canberra.

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Table 8: All banks lending to business, Australia a2009–10 2010–11 2011–12 f

Dec Mar Jun Sep Dec Mar Jun Sep$b $b $b $b $b $b $b $b

Agriculture, fishing and forestry

58.4 55.5 59.1 58.7 58.8 57.8 60.4 60.5

Mining 13.9 12.9 12.1 11.3 11.2 14.1 12.1 13.2Manufacturing 40.6 49.9 39.2 38.6 38.2 40.8 39.9 42.1Construction 29.7 32.5 28.2 28.3 28.2 29.4 28.4 27.7Wholesale, retail trade, transport and storage

91.9 96.1 90.5 89.3 92.0 91.9 92.5 95.2

Finance and insurance 134.5 142.6 133.0 132.0 125.0 128.7 114.8 120.1

Other 311.3 321.6 307.3 306.6 303.9 310.4 307.1 306.4Total 680.4 711.0 669.3 664.7 657.2 673.0 655.2 665.2

a Includes variable and fixed interest rate loans outstanding plus bank bills outstanding.Source: Reserve Bank of Australia, Bank Lending to Business – Selected Statistics, Bulletin Statistical Table D8.

Table 9: Capital expenditure of private enterprises2006–07 2007–08 2008–09 2009–10 2010–11$m $m $m $m $m

At current pricesGross fixed capital formation aAll sectors 299101 336357 351111 356035 371147

New capital expenditureMining b 23621 29201 37977 35185 47247Manufacturingfood, beverages and tobacco 2256 2596 2492 2566 2882

textiles, clothing, footwear and leather 139 112 118 140 70

wood and paper product 759 928 897 719 610printing, publishing and recorded media 353 396 450 452 187

petroleum, coal and chemical product 1767 2126 2239 2207 2320

non-metallic mineral product 467 474 609 731 806metal product 4761 4137 4608 3689 4017machinery and equipment 1436 1110 1160 1112 1340other manufacturing 58 164 108 126 111total 12106 12340 12682 11743 12343Total surveyed industries 87475 96833 113201 107104 119741

Chain volume measures cGross fixed capital formation aAll sectors 313195 343308 348082 356034 370528

New capital expenditure Mining 25459 30542 37627 35184 47313Manufacturing 12662 13030 12627 11743 12712

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2006–07 2007–08 2008–09 2009–10 2010–11$m $m $m $m $m

Other selected industries 49852 54930 60500 60177 62051Total surveyed industries 88092 98505 110709 107106 122077

a Estimates taken from ABS national accounts, which include taxation-based statistics. b ANZSIC 2006 Division B. c Reference year is 2009–10.Sources: BREE; ABARES; Australian Bureau of Statistics, Australian National Accounts: National Income, Expenditure and Product, cat. no. 5206.0, Canberra; Australian Bureau of Statistics, Private New Capital Expenditure and Expected Expenditure, Australia, cat. no. 5625.0, Canberra.

Table 10: Private mineral exploration expenditure2005–06 2006–07 2007–08 2008–09 2009–10 2010–11$m $m $m $m $m $m

At current pricesEnergyPetroleum onshore 355.8 498.2 493.8 492.3 748.6 756.5offshore 906.1 1727.3 2541.1 3318.4 2745.5 2558.9total 1261.9 2225.5 3034.9 3810.7 3494.1 3315.4Coal 166.4 193.2 234.8 297.3 321.2 519.7Uranium 56.1 114.1 231.5 185.2 169.1 213.9Total 1484.4 2532.8 3501.2 4293.2 3984.4 4049.0

Metals and other minerals aGold 399.6 455.9 592.6 438.0 575.4 652.2Iron ore 161.3 285.4 449.8 588.7 524.1 665.0Base metals, silver and cobalt b 356.7 555.0 783.2 519.1 457.2 669.5

Mineral sands 29.2 37.3 37.0 30.6 na naDiamonds 22.6 26.9 21.7 10.0 na naOther 48.8 46.8 110.8 154.3 147.2 196.2

Total metals and other minerals a 1018.2 1407.3 1995.1 1740.7 1742.3 2217.7

Total expenditure 2502.6 3940.1 5496.3 6033.9 5726.7 6266.7

a Uranium is included with energy. b Base metals include copper, lead, nickel and zinc. s BREE estimate.Sources: BREE; Australian Bureau of Statistics, Mineral and Petroleum Exploration, Australia, cat. no. 8412.0, Canberra.

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Table 11: Annual world indicator prices of selected commodities aunit 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 f

EnergyCrude oilDubai US$/bbl 61.2 90.4 68.5 74.2 92.2 104.7West Texas Intermediate US$/bbl 63.4 96.8 70.3 75.2 89.3 96.6Brent dated US$/bbl 64.0 95.2 68.8 74.5 96.0 112.8

Uranium (U3O8) a US$/lb 81.15 80.75 51.25 43.81 57.13 51.88

Minerals and metals bAluminium US$/t 2692 2665 1781 2017 2379 2286Copper US$/t 7087 7791 4936 6634 8665 8301Gold c US$/oz 639 823 874 1092 1372 1715Iron ore (negotiated) d USc/dmtu 73 80 145 97 180 230Lead US$/t 1693 2904 1459 2093 2392 2185Manganese (negotiated) e US$/t 258.2 540.9 1340.1 544.9 768.0 na

Nickel US$/t 37909 28564 13322 19390 23963 20171Silver USc/oz 1274 1544 1289 1688 2880 3465Tin US$/t 11455 18529 13576 16202 23960 20011Zinc US$/t 3723 2606 1403 2066 2243 2046

a Average of weekly restricted spot prices over the period, published by Ux Consulting. b Average LME spot price unless otherwise stated. c London gold fix, London Bullion Market Association. d Australian hematite fines to Japan (fob) for Japanese Fiscal Year commencing 1 April. BREE Australia–Japan average contract price assessment. e Japanese Fiscal Year commencing 1 April. f BREE forecast. na Not available.Sources: BREE; Australian Bureau of Statistics; International Energy Agency; ISTA Mielke and Co.; London Bullion Market Association; The London Metal Exchange Ltd; Reuters Ltd; Ux Consulting Company; Platts Oilgram; US Department of Energy; World Bureau of Metal Statistics.

Table 12: World production, consumption and trade for selected commodities a

unit 2007 2008 2009 2010 2011 2012Energy Crude oilProductionworld b mbd 85.7 86.5 85.6 87.4 88.5 89.8OPEC c mbd 34.9 35.8 34.1 34.8 35.8 36.2Consumption b mbd 86.5 86.2 85.6 88.3 89.1 89.8

Coal Productionhard coal d Mt 5306 5653 5842 6020 6225 6443brown coal Mt 954 965 913 930 935 954Exportsmetallurgical coal Mt 227 234 220 273 271 293thermal coal Mt 696 704 721 794 836 872

Uranium (U3O8) Production es kt 48.6 53.5 53.3 55.2 56.6 58.2

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unit 2007 2008 2009 2010 2011 2012Consumption kt 77.7 76.2 77.2 79.8 73.8 77.3

Metals Bauxite production kt 209014 217469 193038 203460 243673 247478

Alumina production kt 74120 77564 73667 81023 87026 88385

Aluminiumproduction kt 38186 39669 37198 41093 43513 44192consumption kt 37409 36904 34764 39657 41795 43603closing stocks g kt 2961 4709 6485 6501 7098 7687Iron and steel Productioniron ore h Mt 1699 1693 1588 1815 2080 2144pig iron Mt 946 927 900 1020 1133 1193crude steel Mt 1344 1330 1220 1415 1511 1585Iron ore trade Mt 830 897 948 1055 1073 1138GoldMine production t 2476 2408 2589 2689 2752 2842Supply t 3942 3959 4318 4261 3934 3914Fabrication consumption i t 3102 3023 2511 2779 2766 2784

Base metalsCopperproduction j kt 18044 18497 18605 19222 19578 20329consumption kt 18143 18138 18153 19204 19508 20420closing stocks kt 682 845 1125 1017 957 866Leadproduction j kt 8331 9055 9024 9627 10335 10653consumption kt 8383 9045 8966 9586 10147 10556closing stocks kt 268 307 390 447 635 720Nickelproduction j kt 1419 1382 1322 1446 1600 1690consumption kt 1326 1278 1241 1464 1572 1656closing stocks kt 125 155 234 213 172 207Tinproduction j kt 349 332 333 352 369 369consumption kt 357 337 322 368 375 375closing stocks kt 35 32 46 16 5 45Zincproduction j kt 11345 11778 11286 12830 13062 13480consumption kt 11232 11565 10920 12572 12709 13345closing stocks kt 638 820 1217 1562 1915 2050Mineral sandsProductionilmenite k kt 12117 11422 9881 11470 11310 11614titaniferous slag kt 2670 2695 2247 2749 2545 2610rutile concentrate kt 610 615 572 708 679 639zircon concentrate kt 1367 1282 1067 1338 1442 1376

a Some figures are not based on precise or complete analyses. b 1 million litres (1 megalitre) a year equals about 17.2 barrels a day. c Includes OPEC natural gas liquids. d Includes anthracite and bituminous coal, and for the United States, Australia and New Zealand, sub-bituminous coal. e World production data have been revised to exclude reprocessed uranium.

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g LME and producer stocks. h China’s iron ore production adjusted to world average. i Includes jewellery consumption. j Primary refined metal. k Excludes some small producers and large tonnages produced from ilmenite–magnetite ore in the Commonwealth of Independent States. s BREE estimate. f BREE forecast. na Not available.Sources: BREE; ABARES; Australian Bureau of Statistics; Consolidated Gold Fields; Economic Commission for Europe; Gold Fields Mineral Services; International Atomic Energy Agency; International Energy Agency; International Iron and Steel Institute; International Lead–Zinc Study Group; International Nickel Study Group; ISTA Mielke and Co.; Metallgesellschaft A.G.; UNCTAD Trust Fund on Iron Ore; United Nations; World Bureau of Metal Statistics.

Table 13: Commodity production, Australiaunit 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 f

EnergyCoalblack, saleable Mt 325.4 326.2 339.6 362.5 344.8 378.0black, raw Mt 417.0 422.8 446.2 466.9 453.4 500.9brown Mt 65.6 66.0 68.3 68.8 65.7 naPetroleumcrude oil and condensate ML 27651 k 25610 k 26407 k 25583 k 24752 k 23690 petroleum products a ML 43652 44086 44111 41892 43141 42799gas b Gm3 40.8 41.7 44.5 50.1 53.1 55.9LPG (naturally occurring) ML 4550 3971 3930 4097 3907 3915Uranium (U3O8) t 9589 10123 10311 7109 7069 7079

Metalliferous minerals and metalsAluminiumbauxite Mt 62.7 63.5 64.1 67.8 68.5 71.0alumina kt 18506 19359 19597 20056 19544 20474aluminium (ingot metal) kt 1954 1964 1974 1920 1938 1936Coppermine production d kt 859 847 890 819 952 1025refined, primary kt 435 444 499 395 485 487Goldmine production d t 250.8 229.7 217.9 239.7 265.1 268.0Iron and steelore and concentrate e Mt 287.7 324.7 353.2 423.4 450.0 504.3iron and steel Mt 8.0 8.2 5.6 6.9 7.3 5.3Leadmine production d kt 642 641 596 617 697 707refined g kt 191 203 213 189 190 194bullion kt 114 152 155 148 133 152Manganeseore, metallurgical grade kt 5046 5428 3730 5795 6784 7204metal content of ore kt 2037 2188 1504 2365 2756 2960Nickel h mine production d kt 191 190 185 157 195 219refined, class I s kt 104 105 95 114 90 110refined, class II i kt 15 15 15 6 10 15total ore processed j kt 225 222 213 196 232 269Silvermine production d t 1674 1867 1764 1809 1792 1905refined t 618 605 751 701 712 883Tinmine production d t 2061 1767 4045 19829 18410 s 9202refined t 321 na na na na na

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unit 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 f

Titaniumilmenite concentrate s kt 2383 2205 1932 1398 1275 1298leucoxene concentrate s kt 169 153 117 123 200 228rutile concentrate s kt 279 332 285 361 467 482synthetic rutile s kt 729 672 732 553 542 519titanium dioxide pigment s kt 207 201 214 222 204 204Zincmine production d kt 1375 1571 1411 1362 1479 1574refined kt 496 507 506 515 499 521Zircon concentrate s kt 564 563 485 408 674 698

Other mineralsDiamonds ’000 ct 24632 16528 15169 11138 8027 10168Salt kt 11229 9826 11314 11772 11562 s 11413

a Includes production from petrochemical plants. b Includes ethane, methane and coal seam gas. c Uranium is included with energy. d Primary production, metal content. e Excludes iron oxide not intended for metal extraction. g Includes lead content of lead alloys from primary sources. h Products with a nickel content of 99 per cent or more. Includes electrolytic nickel, pellets, briquettes and powder. i Products with a nickel content of less than 99 per cent. Includes ferronickel, nickel oxides and oxide sinter. j Includes imported ore for further processing. k Energy Quest. s BREE estimate. f BREE forecast.

Sources: BREE; ABARES; Australian Bureau of Statistics; Consolidated Gold Fields; Coal Services Pty Limited; Department of Resources, Energy and Tourism; Energy Quest; International Nickel Study Group; Queensland Government, Department of Natural Resources and Mines.

Table 14: Volume of commodity exportsunit 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 f

Resources and energyResourcesMetalliferous minerals and metals cAluminiumalumina kt 15056 15739 16395 16653 16227 16818aluminium (ingot metal) kt 1638 1650 1748 1624 1686 1701Copperore and concentrate d kt 1493 1694 1797 1928 1750 2020refined kt 290 296 361 271 375 383Gold e t 400 382 437 335 301 331Iron and steeliron ore and pellets Mt 257 294 324 390 407 473iron and steel g kt 2648 2131 1741 1549 1785 1185Leadores and concentrates kt 422 308 381 491 494 475refined kt 215 193 261 186 213 233bullion kt 112 169 147 151 93 147Manganese d kt 4667 5105 3226 5648 6190 6841Nickel es kt 207 211 194 221 210 243Titaniumilmenite concentrate h kt 999 894 1538 1763 1804 2045

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unit 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 fleucoxene concentrate kt 134 69 61 18 27 31rutile concentrate kt 307 399 550 575 491 356synthetic rutile s kt 508 513 512 513 517 562titanium dioxide pigment kt 171 175 141 181 195 189Refined silver t 431 335 423 420 198 353Tin e t 1867 3079 4159 6031 5431 5343Zincores and concentrates d kt 1948 2323 2101 2271 2317 2312refined kt 374 411 451 425 410 449Zircon concentrate i kt 555 637 685 748 963 849

Other minerals

Diamonds ’000 ct 24632 16528 16279 10355 9900 11526

Salt kt 10749 10686 10978 11185 11162 10884

EnergyCrude oil a ML 15965 15975 16588 18064 19638 18944LPG ML 2824 2589 2500 2776 2471 2281LNG bs Mt 14 14 15 18 20 20Petroleum products ML 1752 1807 1164 850 760 804Metallurgical coal Mt 132 137 125 157 140 148Thermal coal Mt 112 115 136 135 143 162Uranium (U3O8) t 9519 10139 10114 7555 s 6950 s 7079

a Includes condensate and other refinery feedstock. b 1 million tonnes of LNG equals aprroximately1.31 billion cubic metres of gas. c Uranium is included with energy. d Quantities refer to gross weight of all ores and concentrates. e Quantities refer to total metallic content of all ores, concentrates, intermediate products and refined metal. g Includes all steel items in ABS, Australian Harmonized Export Commodity Classification, ch. 72, ’Iron and steel’, excluding ferrous waste and scrap and ferroalloys. h Excludes leucoxene and synthetic rutile. i Data from 1991–92 refer to standard grade zircon only. s BREE estimate. f BREE forecast.Sources: BREE; ABARES; Australian Bureau of Statistics, International Trade, Australia, cat. no. 5465.0, Canberra; Australian Mining Industry Council; Department of Foreign Affairs and Trade; Department of Resources, Energy and Tourism; International Nickel Study Group.

Table 15: Value of commodity exports (fob)2006–07 2007–08 2008–09 2009–10 2010–11 2011–12$m $m $m $m $m $m

ResourcesMetalliferous minerals and metalsAluminium bauxite s 108 206 192 178 229 282alumina 6243 5809 6015 4969 5218 5970aluminium (ingot metal) 5650 4967 4724 3838 4178 3803Copper core and concentrate 3914 4151 3618 4526 5130 5942refined 2612 2579 2245 1980 3292 3106Gold c 10320 10903 16146 12996 13016 17265Iron and steeliron ore and pellets 15512 20511 34239 35075 58387 59708iron and steel 1743 1562 1363 1120 1303 886

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2006–07 2007–08 2008–09 2009–10 2010–11 2011–12$m $m $m $m $m $m

Lead cores and concentrates 855 757 645 998 1301 1167refined 457 674 560 425 511 510bullion 268 595 432 409 248 410Manganeseore s 482 1532 1406 1395 1407 1312Titaniumilmenite concentrate d 113 104 171 197 198 225leucoxene concentrate 42 23 37 11 17 22rutile concentrate 259 277 335 382 390 256synthetic rutile s 361 305 258 269 315 309titanium dioxide pigment 408 375 396 448 527 584Nickel s 7912 5412 2717 3875 4096 4012Refined silver 221 187 245 254 164 375Tin c 25 42 70 101 126 106Zinc cores and concentrates 2590 2031 935 1237 1479 1280refined 1707 1319 923 977 893 895Zircon concentrate e 478 421 540 370 532 340Total metalliferous minerals and metals 62280 64745 78212 76031 102955 108764

Other mineralsDiamonds s 726 625 676 471 366 421Salt 239 232 237 247 251 245Other 4843 6169 4778 5241 5969 12509Total other minerals 5808 7026 5691 5959 6586 13175

Total resources 68088 71771 83903 81990 109541 121939

EnergyCrude oil a 8317 10484 8757 9534 11772 12621LPG 1038 1182 1044 1105 1068 1040LNG 5222 5854 10079 7789 10437 11647Bunker fuel b 1295 1457 1537 1315 1508 1672Other petroleum products 1098 1323 788 566 526 601Metallurgical coal 15039 16038 36813 24526 29793 31094Thermal coal 6758 8365 17885 11886 13956 17845Uranium (U3O8) 660 887 990 757 s 610 s 707

Total energyderived as sum of above 39427 45591 77892 57478 69670 77227on balance of paymentsbasis (excl. bunker fuel) 37569 43492 75660 55741 67718 75153

Total resources and energy exports Derived as sum of above 107515 117362 161796 139468 179211 199166On balance of payments g 106220 115904 160259 138154 177703 197494

Total agricultural exports At current prices 31748 31340 35905 32082 36079 38017On balance of payments g 30400 29971 33917 30476 34366 35657

Total commodity exports h

147

2006–07 2007–08 2008–09 2009–10 2010–11 2011–12$m $m $m $m $m $m

Derived as sum of above 139263 148702 197701 171551 215290 237183On balance of payments g 136619 145875 194176 168630 212069 233151

a Includes condensate and other refinery feedstock. b International ships and aircraft stores. c Value of metals contained in host mine and smelter products are not available separately and are included in the value of the mineral product or metal in which they are exported. d Excludes leucoxene and synthetic rutile; data from 1991–92 refer to bulk ilmenite only. e Data refer to standard grade zircon only. g As derived in table 1. s BREE estimate. f BREE forecast.Sources: BREE; ABARES; Australian Bureau of Statistics, International Trade, Australia, cat. no. 5465.0, Canberra; Department of Resources, Energy and Tourism.

Table 16: Value of imports of selected commodities, Australia2006–07 2007–08 2008–09 2009–10 2010–11$m $m $m $m $m

Resources and energyaluminium (ingot metal) 11 10 10 27 18

diamonds 397 444 417 442 397ferroalloys 116 154 181 118 127gold (refined and unrefined) 5309 7311 11250 7739 5426

ingot steel 2479 2225 3191 1889 2121iron ore 338 311 269 259 417petroleumcrude oil a 13360 17149 14727 15031 19578natural gas 800 724 2166 1219 1929petroleum products b 7784 12730 13129 11296 12050

phosphate rock 32 80 193 10 57phosphates 267 778 549 347 628silver 98 80 223 107 490other 707 483 794 1183 859

Total resources and energy 31698 42479 47098 39666 44097

a Includes condensate and other refinery feedstock. b Includes LPG.Sources: BREE; Australian Bureau of Statistics, International Trade, Australia, cat. no. 5465.0, Canberra.

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BREE contacts

Executive Director / Chief Economist – BREE

Quentin Grafton [email protected](02) 6243 7483

Micro & Industry Performance Analysis – Theme Leader

Arif Syed [email protected](02) 6243 7504

Macro & Markets Analysis – Theme Leader

Jin Liu [email protected](02) 6243 7513

Resources Program – Program Leader

Alan Copeland [email protected](02) 6243 7501

Quantitative Economic Analysis – Program Leader

Nhu Che [email protected](02) 6243 7539

Energy Program – Program Leader

Allison Ball [email protected](02) 6243 7500

Data & Statistics Program – Program Leader

Geoff Armitage [email protected](02) 6243 7510

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