Challenges abound for local resource sector

Rain, floods, Covid, the Russian invasion of Ukraine, supply chain obstacles, inflation and rising costs have eaten into the bullish estimates for Australia’s exports of energy and minerals in the financial year that ended last Thursday, June 30.

But despite these negatives and despite looking a bit older, the boom remains in place.

In its resources and energy quarterly report released on Monday, the federal Department of Industry estimated the value of resource exports in the 2021-22 financial year at a record $405 billion, up 26% from the previous record of $320 billion in Covid-impacted 2020-21 but lower than the official forecast in March of $425 billion. The reduction was caused by heavy rain and flooding in Queensland, NSW, South Australia and WA in the June half year.

Companies from OZ Minerals, Ramelius Resources, Evolution Mining, and Whitehaven Coal have already mentioned these factors as limiting production and exports in the March or June quarters.

June quarter production and sales reports to be released later this month will no doubt reveal further details of the impact of these factors.

But the updated estimates for the new financial year suggest that resource and energy companies will again be the stand out performers for a third financial year in a row so far as revenues and earnings are concerned.

But costs and supply chain problems, as well as health concerns led by Covid, will again dog the sector and crimp margins – especially in iron ore, coal, gold and copper.

In the 2022-23 year, the Department forecasts Australia’s mining and energy export revenues to rise 3% to a record $419 billion. That is up $38 billion from March’s forecast because of the impact of the Russian invasion on prices for energy commodities.

 That will be down to still high coal, oil and gas prices in the wake of Russia’s invasion of Ukraine, though the last two weeks of June saw a significant weakening in base metal (especially copper), iron ore and coking coal prices.

Earnings should fall back below $338 billion in 2023–24, according to the quarterly report. That is up by around $28 billion from the March forecast and would be the third highest annual amount on record.

“The outlook is for the prices of energy commodities to remain strong for longer than previously forecast, as Western nations look for alternatives to Russian energy supplies,” the Department of Industry said in its resources and energy quarterly report.

Earnings from coal and liquefied natural gas have both more than doubled in the past 12 months.

It is expected the trade figures will show that exports of thermal coal jumped from $16 billion to $39 billion year-on-year as a result of historically high prices, while the value of metallurgical coal rose from $23 billion to $60 billion over the year.

Iron ore remains Australia’s most valuable export, with the new trade figures estimating its export earnings reached $133 billion for the year.

But those earnings were expected to decline as mines in Brazil lift production volumes and global demand slows and revenue will be down 12% to around $116 billion in 2022-23 with the average price falling to $99 a tonne from $119 a tonne. The price ended 2021-22 around $US113 a tonne.

“The price has steadied in a US$110-140 a tonne range in recent months, as China’s government continues to support economic activity,” the quarterly noted about iron ore prices.

The value of LNG exports is forecast to jump 19% to $84 billion in the year to June 2023, even as volumes are expected to slip by 3% with output declining from gas fields feeding the North West Shelf and Darwin LNG plants.

Exports of thermal coal used in power generation are expected to rise 15% to $44 billion on strong prices and a small rise in volume, as Australian coal is seen in global markets as the main alternative to Russia’s higher coal grades.

Revenue from metallurgical coal used in steelmaking is forecast to climb 3% to $60 billion – much of that should flow to BHP, Whitehaven, Glencore, Peabody and South 32.

“With inventories of energy in the Northern Hemisphere well below normal, any supply disruptions will result in more price surges,” the quarterly said, pointing to potential declines in coal output due to heavy rains lashing eastern Australia.

“The risks to the forecast for Australia’s export earnings in 2022–23 and 2023–24 are skewed modestly to the downside,” the report noted.

“Markets appear to have largely priced in the loss of some Russian resource and energy commodity output from world supply.

“New outbreaks of vaccine-resistant COVID-19 strains also pose risks to the outlook, especially if they occur in China where small outbreaks are currently being met with aggressive suppression measures: through direct impacts on global commodity demand, and via global supply chains and economic growth.”

The report reveals that Australia’s estimated gold export earnings for 2021–22 have been revised down to $23.5 billion — a fall of 3.8% from the March Quarterly, “mostly reflecting lower than expected export unit values in March quarter 2022.”