Exports outlook — Another challenging year ahead

Resources and energy exports. Australia’s resource and energy exports are forecast to fall from the record $290 billion registered in 2019-20 (Chart). Over the next 18 months, lower prices for some commodities and a resilient Australian dollar will likely more than offset prospects for gains in export

Iron ore exports have been a bright spot in 2020, benefitting from strong Chinese steel production linked to rising infrastructure investment and supply issues in Brazil. Prices sit at 7-year highs of above US$150/tonne as of mid-December. But futures markets pricing points to softer iron ore prices over the next two years, albeit remaining at or above the average price over the past 10 years (Chart). Treasury forecasts prices falling to US$55/tonne by end-June 2021. Prospects for increasing production should largely reduce the impact of price declines, leading to still relatively strong iron ore export earnings over the next few years.

Ongoing strength in copper and nickel exports is likely in 2021, as global industrial activity continues to recover. Under Beijing’s latest five-year plan, China aims to have new electric vehicles account for about 20% of total car sales by 2025, which will support demand for copper and other base metals. Copper prices hit 7-year highs of US$7,700/tonne in early December and are likely to continue to rise on the back of lingering supply disruptions, a wave of “green” economic stimulus from several countries (for instance, copper is used in wind and solar), and China’s rapid economic recovery.

Gold exports are forecast to reach a record high of $32 billion in 2020-21. Recent strength in prices is likely to encourage an expansion in production, supporting higher export volumes in the coming year. Thereafter, exports are likely to decline to around $28 billion in 2021-22, as gold prices ease on the back of global economic recovery and rising investor risk appetites.

Reports of Chinese import restrictions on Australian metallurgical and thermal coal, if substantiated, could point to lower demand ahead, reducing prices and export volumes. For metallurgical coal, price and volume weakness will come off the back of record Chinese buying of Australian coking coal through 2020. Although coal power generation from key importers such as India, Japan and South Korea is returning to normal, lower LNG prices and environmental issues will likely continue to prompt growing demand for gas relative to thermal coal.

COVID-19 took a severe toll on oil and LNG gas prices through 2020, denting export performance. Oil and gas demand are gradually recovering as travel restrictions slowly ease and industrial output recovers. But LNG export volumes will likely face downward pressure as Australia’s LNG capacity expansion has come to an end, and extended maintenance at some facilities and issues at export terminals weighs on production in the near term. Oil and gas prices are likely to continue recovering from the lows reached in 2020, supporting a rebound in export values in 2021-22.

Services exports are projected to decline through at least the next 18 months, according to the government’s 2020-21 budget. Recent positive news on COVID-19 vaccines paves the way for a recovery in international air travel in coming years; China and many European countries have removed bans on foreign entry from some countries. However, amid the resurgence of the COVID-19 virus in Europe, the US and many other countries, international tourism will suffer throughout most of 2021. The government expects education exports to fall over the year to June 2022, as the number of foreign student arrivals remains low and some existing students depart. The economic downturn in some target markets will also reduce demand for international education. The take-up of online study by international students may provide some support to the education sector. But even as services exports recover as international travel picks up, it will take some time to return to pre-COVID-19 levels.

Agriculture exports are projected to fall 7% to $44.8 billion over the year to June 2021. Higher crop production will flow through to higher crop exports (particularly wheat and canola). But that will be more than offset by lower exports of livestock products and fibres (particularly beef and veal, wool, mutton and lamb), where production remains subdued following drought. COVID-19 containment measures have had a limited impact on agricultural markets due to consumers switching from restaurants to home consumption. Agricultural trade has also been far less disrupted by efforts to contain the spread of COVID-19 than trade in other goods. This is because food demand is generally more stable in response to changes in income and bulk shipping—the main mode of transport for agricultural trade—has been less disrupted than airfreight.

However, trade disruptions with China have created uncertainties for some Australian agricultural exports. Wool and cotton exports may be particularly exposed by trade disruptions or a downturn in Chinese demand, given a high dependence on China and fewer export links to other markets (Chart). Wine and barley—which have already been impacted by Chinese trade actions—are also exposed. Although some Australian wine exporters are expected to divert trade to existing markets, such as the UK and the US, the significant additional duties in the Chinese market will likely reduce production and sales in 2020-21.

Manufacturing exports are likely to recover in line with global demand, but competitiveness will be challenged by a resilient Australian dollar. The budget announced an additional $1.3 billion over the next four years to help manufacturers upscale their businesses, build competitiveness and connect to global value chains. The so-called Modern Manufacturing Initiative will help support manufacturing businesses in six priority areas, including resources technology and critical minerals, food and beverages, medical products, recycling and clean energy, defence and space. Effective implementation could boost Australia’s manufacturing export potential over time.

The Australian dollar has risen about 8.5% in 2020 to sit at US74 cents in early December (Chart). Financial market pricing indicates the Australian dollar will stay around these levels in the next few years. The Australian dollar will receive support from resilient commodity prices (particularly iron ore, copper and aluminium) and a strengthening domestic economic recovery. Optimism around vaccines and treatments for COVID-19 are likely to remain supportive of rising investor sentiment, and by extension, demand for the Australian dollar. Notable downside pressure to the Australian dollar stems from risks around a stumbling global economic recovery, renewed commodity price weakness, the potential for additional monetary easing from the Reserve Bank of Australia and trade issues with China.