Investment in new mining and upstream production capacity in Australia is expected to rise further in the current 2021-22 fiscal year to 30 June, and even higher in 2022-23, boosted by the sanctioning of the $12bn Scarborough gas field offshore Western Australia, according to the Australian government's 2021-22 budget update paper.
Mining investment is forecast to rise by 4pc from a year earlier in 2021-22 and by 8pc in 2022-23, said the Australian treasury in the Mid-year Economic and Fiscal Outlook (MYEFO) 2021-22. Private-sector capital expenditure in Australia's mining and upstream sectors rose by 2.7pc to A$36.11bn ($25.8bn) in 2020-21, data from the Australian Bureau of Statistics show.
Iron ore investment is continuing, largely reflecting investments to maintain production capacity, while Australian independent Woodside Petroleum has made a final investment decision to proceed with the Scarborough and Pluto train two LNG developments, the MYEFO said.
Mining exports are expected to increase by 4pc in 2021-22 driven by growth in iron ore, thermal coal and LNG exports as the temporary factors that subdued volumes in 2020-21 unwind and new production comes on line. Australia had record trade export receipts of A$245bn in 2020-21.
Mining exports are expected to continue to increase by 4.5pc in 2022-23 as iron ore production from the ramp-up of new mines, such as BHP's South Flank and Rio Tinto's Gudai Darri projects, exceed the falling production from older mines.
But commodity prices remain volatile and susceptible to global shocks such as the recent slowing in the Chinese steel sector, with the spike in iron ore unwinding rapidly in recent months, the MYEFO said. The Argus ICX iron ore was last assessed at $107.10/dry metric tonne (dmt) cfr Qingdao on a 62pc Fe basis on 15 December, down from a high of $235.55/dmt on 12 May.
The key drivers of iron ore price volatility have been a strong cycle in Chinese steel demand and supply disruptions. Chinese steel production increased sharply in the first half of 2021 to feed strong construction activity but has since unwound because of policy-induced steel production curbs aimed at limiting carbon emissions and softer demand as a result of the slowdown in the real estate sector, the MYEFO said.
Falling prices
The Australian government forecasts the iron ore price falling to $55/t fob by the end of the April-June quarter 2022. This is one quarter later than was assumed in the 2021-22 budget, it said. Metallurgical and thermal coal prices are assumed to fall to reach $130/t and $60/t respectively by the end of the April-June 2022.
Argus premium hard low-volatile Australia fob metallurgical coal was assessed on 15 December at $342/t, with Argus Newcastle 6,000 kcal/kg NAR fob thermal coal at $158.31/t on 10 December. Factors keeping coal prices at current levels, such as supply disruptions, are expected to be temporary, the MYEFO said.
The latest Australian budget papers also add some caution about its largest trading partner China, which accounted for around 36pc of all Australian exports during January-October 2021. Key risks to the economic outlook relate to the policy challenges China faces in managing the Covid-19 virus and the slowdown in the domestic real estate sector.
"If policy makers continue to pursue an elimination strategy, this may require greater restrictions on economic activity," the MYEFO said. "If policymakers pursue and fail to sustain elimination and the virus circulates more freely, this could see households become more precautionary and consumption growth slow. The slowdown in China's property sector is delicately poised, with financial stability risks as developers with large liabilities come under financial strain, it added.
