Investors should realise that Australian resource and energy companies are set up for at least two years of record and near record revenues and earnings as the re-ignited commodity boom looks set to continue.
Thanks to the Russian invasion of Ukraine and the boost it has given to global commodity prices, especially energy, Australia is heading for record resource and energy export earnings of $425 billion in 2021–22.
If achieved that will be up $46 billion on the December forecast of $379 billion, according to the March Resource and Energy Quarterly from the federal government.
More importantly that will be a massive $115 billion and more than a third higher than the $310 billion in the Covid-depressed 2020-21 financial year.
All major minerals and energy exports will see higher revenues because of big price rises (but smaller rises in volumes) but the star will be Australia’s export earnings from exports of thermal and coking coal which are forecast to rise to about $110 billion in 2021–22.
Coal in fact becomes only the second Australian commodity after iron ore to break through the $100 billion annual export revenues mark.
Coal’s earnings will fall just short of iron ore’s which are forecast to fall to $134 billion from 2021’s record $158 billion. That’s despite a rise in forecast exports to 897 million tonnes by June 30 this year from 867 million a year earlier.
The average iron ore price is forecast to fall to $US118 a tonne from $US140 a tonne in 2020-21.
The combined export earnings for lithium, nickel and copper could top $23 billion in 2021-22, which would be up 38% on 2020-21 and a further sign of what’s to come for the renewables sector.
Gold prices are forecast to rise to an average of $US1,850 an ounce this year from $US1,789 an ounce last financial year.
Oil prices will average $US92 a barrel, according to the quarterly’s forecasts, up from $US54 a barrel and LNG will more than double to an average of $A16 a Gigajoule from $A7 a Gigajoule in 2020-21. Exports are forecast to rise to 82 Gigajoules this year from 77 in 2020-21
Looking into the 2022-23 financial year, while exports are expected to ease to around $370 billion that will still be $62 billion above the December, 2021 quarterly’s estimate and an indication of how long the higher prices will stay around, especially for energy.
For that we can ‘thank’ the Russian invasion of Ukraine, western sanctions on Russia and the drying up of Russian commodity exports which will boost economies such as Australia (and Canada).
But investors should be wary though looking out into 2023 as commodity prices and demand start rubbing up against attempts by central banks to slow surging inflation by lifting interest rates to slow demand and the pace of growth.
This will eventually have an impact on economic activity as higher interest rates start biting and future export income from resources and energy will start slowing.
China is already seeing a slowdown -without any central bank move to lift rates – from a combination of factors including a new and worrying Covid outbreak, a worsening contraction in its highly leveraged property sector, weak consumer demand and 18 months of hectoring and monstering of Chinese businesses, especially those privately-owned online giants like Tencent and Alibaba.
But for the time being, Australia stands out as a major beneficiary from the Russian invasion.
As the quarterly comments “a number of significant events have affected the global resources and energy sector since the publication of the December 2021 edition of the Resources and Energy Quarterly, with the most significant being the Russian invasion of Ukraine.”
“Global commodity markets are likely to be affected not just by war itself, but by the expanding array of sanctions now being applied to Russia. It is too early to tell how broad and long-lasting these sanctions will be, but it does appear that world trade and investment flows will become more bifurcated in line with geopolitical alliances over the outlook period. Commodity supply chains will be forced to adjust.”
“Rising gas and coal prices caused by the Russian invasion of Ukraine will also affect China, given its high sensitivity to energy prices. China has also been forced to manage renewed outbreaks of the COVID-19 pandemic in the March quarter 2022, with recent lockdowns affecting tens of millions of people.
“Over the last few months, a new (Omicron) variant of the COVID-19 virus has swept the world, and severe weather conditions have disrupted the output and export of bulk commodities. However, the La Niña weather pattern appears set to end in mid-2022, removing some threat to the supply of resource and energy commodities.
“Inflation has picked up in most major economies, and many major central banks have begun tightening monetary policy. With global energy prices at record levels, and energy inventories in the Northern Hemisphere well below normal, prices (and thus inflation) will face more upward pressure in the near term. “
So it seems the good times will roll on, but it will pay to be increasingly wary and watch consumer demand, key commodity markets and political results like the Australian elections, the French polls in the next month, the 20th Chinese Communist Party Conference in October and President Xi Jinping’s attempts to be elected for a third five year term and the US midterms in November.
And of course, keep counting the rate rises from the US Federal Reserve which could turn out to be the key factor dampening global demand and prices.
