Exports outlook—Ongoing commodities strength, as services recover
Prospects for continued recovery in global demand supports a robust outlook for goods exporters in 2022. In particular, resources, energy and agricultural exports are predicted to remain strong. The tentative reopening of international travel in late 2021 points to a pick-up in services exports in the coming year, but the tourism and education recovery will remain subdued, with the emergence of the Omicron variant reminding of vulnerability to setbacks. Businesses are confident about export opportunities next year. According to the DHL Export Barometer, 69% of Australian exporters anticipate an increase in orders over the next 12 months, up from 47% in 2020 as customer demand grows. Ongoing recovery in major export markets supports this view.
Stronger energy and base metals exports, as iron ore softens
Australia’s resources and energy exports are forecast to rise 13% to a record $349 billion in 2021-22, driven by a stronger outlook for coal, LNG and base metals and a weaker Australian dollar. Some moderation in prices is likely in 2022, as supply rises and demand growth moderates, leading to lower but still high export receipts of around $300 billion in 2022-23 (Chart).
Iron ore prices fell from highs of US$230 per tonne in May to US$100 in early December, reflecting China’s efforts to limit 2021 steel output (to 2020 levels) and reduce energy emissions, alongside an increase in Brazilian supply. Prospects for increasing export volumes in coming years, as production commences at several new mines in Western Australia, should help mitigate price declines and support continued strong export earnings.
Demand for Australia’s higher-grade metallurgical and thermal coal is likely to remain strong in the near term to fuel power generators in Asia and for steel and industrial production. But as supply constraints ease and weather conditions normalise, prices are likely to fall from current high levels. Indeed, thermal coal prices have fallen from an average of roughly US$240 per tonne in October to US$150 in early December as Chinese authorities allow some mines to boost coal production (Chart). Longer term, carbon-intensive exports could weaken as major economies focus on reducing greenhouse gas emissions.
Oil and LNG exports are expected to lift. Brent crude oil prices increased from an average US$53 per barrel over 2020-21 to around US$75 in the second half of 2021. Futures markets suggest the price will remain around US$70 through June 2022. Almost three quarters of Australian LNG is sold via long term contracts linked to the price of oil, with a lag of around three to six months. Higher oil prices will therefore filter through to higher LNG prices. Export volumes are also expected to rise, as technical issues are resolved at the Prelude and Gorgon LNG plants, according to the Department of Industry. Overall, Australia’s LNG exports are forecast to rise from $30 billion in 2020–21 to $56 billion in 2021–22.
Resurgent global industrial activity should continue supporting exports of base metals, particularly copper. Australia is also well placed and is seeking to capture growing demand for base metals used in new and low emission technologies and the global shift towards “greener” electricity generation. In particular, copper, lithium and nickel are used in the production of electric vehicles, of which more than 7 million were sold in 2021, more than double the 3.2 million sold in 2020 (Chart).
Gold exports are forecast to reach a record $29 billion in 2021-22, as production from existing and new mines boosts volumes. Gold prices are likely to fall modestly in 2022. Gold is often considered a hedge against higher inflation, but the US Federal Reserve has indicated it is ready to hike rates next year in response to higher inflation. This increases demand for interest-bearing USD-denominated assets, and by extension, reduces investor demand for gold. The global recovery will remain important in determining the trajectory of gold prices.
Recovery in non-resource exports to continue
Agriculture exports are forecast to increase 27% to a record $61 billion in 2021–22 (Chart), as favourable weather conditions support stronger crop and livestock production. Production is forecast to increase year-on-year for every major livestock commodity and almost every major crop commodity—the first time in at least 50 years that production will increase for so many products at once. If these forecasts are realised, 2021–22 will record the largest total volume of agricultural commodities Australia has ever produced. In addition, strong global demand will continue to support high agricultural prices, boosting export receipts. The bumper export forecast is despite disruptions in trade to Australia's largest agricultural export market, China. The free trade agreement with the UK, once brought in force, and several other trade deals under negotiation, should contribute to enhancing the competitive positions for our meat, beef and other agriculture exports. Downside risks to the outlook stem from La Niña weather conditions, which could undermine winter crop production and exports. Freight disruptions and high shipping costs will also remain a challenge for exporters.
Tourism and education exports are likely to grow at a faster pace in 2022 as a result of the earlier-than-expected reopening of international borders in late 2021. But the overall pace of recovery will remain subdued. The rate of international arrivals will continue to be constrained by record uncertainty and quarantine caps (except for passengers from Safe Travel Zones). Similarly, global tourism is expected to recover in 2022 but remain below pre-COVID-19 levels (Chart). The gradual arrival of international students and migrants over 2022, including through pilot plans, will support education exports. But downside risks to services exports remain high, and ultimately depend on the path of the pandemic both at home and abroad.
The Australian dollar has been steadily depreciating against the US dollar since April, sitting at about US70 cents in early December (Chart). That’s down around 8% from US77 cents in December 2020. The depreciation trend reflects several factors, including indications by the US Federal Reserve that it will soon wind back stimulus measures, the RBA’s pledge to maintain accommodative monetary conditions, and declining iron ore prices on the back of Chinese growth and financial stability concerns. Financial market pricing indicates the Australian dollar will stay around US69-US70 cents in the next few years, though downward pressures on the AUD are high. At around US70 cents, the Australian dollar will remain lower than its 30-year average of US76 cents, a positive for export price competitiveness.