March 29, 2019 / 4:35 AM / a year ago

COLUMN-Australia is enjoying a windfall commodities boom, but it won't last: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

SINGAPORE, March 29 (Reuters) - The good news for Australia is that it can expect a flood of cash from resource exports this fiscal year because of rising exports and relatively strong prices for iron ore, coal and liquefied natural gas (LNG).

The bad news is this windfall is unlikely to be sustained for long, and export earnings are likely to fall in four of the five years after the current 2018/19 fiscal year.

The risk for Australia is that its politicians will be tempted to lock in permanent tax cuts and spending measures based on a likely temporary windfall, especially given the expected federal general election in May.

The Australian government’s Resources and Energy Quarterly, released on Friday, forecasts total earnings from commodity exports at A$277.8 billion ($196 billion) in 2018/19, up 22 percent from the prior fiscal year’s A$227.5 billion.

Australia is the world’s largest exporter of iron ore and coal, and is on the verge of overtaking Qatar as the biggest shipper of LNG.

It’s little surprise that these three commodities make up the lion’s share of resource earnings, with iron ore expected to contribute A$74 billion, coal A$70 billion and LNG A$50 billion.

Much of the strength in earnings from these three heavyweights is down to demand from China, the world’s biggest commodity importer.

The quarterly report said China’s efforts to stimulate its economy will be positive for commodity demand, but Beijing also faces risks from the as yet unresolved trade dispute with the United States.

But while Australia is enjoying the boost to earnings from higher export volumes, and rising prices for some commodities, as well as a weaker domestic currency, the government’s forecaster doesn’t expect this to persist.

The nominal value of commodity exports are expected to drop to A$271.7 billion in the 2019/20 fiscal year and to A$256.1 billion by 2023/24.

The decline in earnings is despite rising volumes for the three major export commodities, with the report pointing to weakening prices as the main culprit.


The report expects iron ore prices to drop to $63 a tonne by 2023/24 from its forecast of $66 in the current fiscal year, and LNG is slated to drop from the current A$12.60 per gigajoule to A$10.80.

The price of coking coal used to make steel is expected to slip from $202 a tonne in the current year to $172 by 2023/24, while that for thermal coal is forecast to dip from $101 to $88 over the same time period.

The decline in prices for most commodities is likely because of global supply additions and moderating demand growth from major importers such as China.

The quarterly report makes for somewhat gloomy reading even beyond the major three commodities, with lower earnings forecast in real terms by 2023/24 for gold, alumina, copper, crude oil, aluminium and zinc.

The only two commodities where earnings are expected to increase over the forecast period are nickel and lithium, which not coincidentally are also two of the main metals used in batteries for electric vehicles and power storage.

The key takeaway from the report is that Australia’s resource sector is enjoying good times right now, but will have to work harder in the future, and even that is unlikely to be enough to stop declining earnings.

That should be a concern for politicians, but given the short, by world democratic standards, three-year terms for the federal government, it’s more likely that both major parties will be tempted to boost popularity by spending the current windfall as if it is a permanent structural change.

Editing by Christian Schmollinger

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