--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, July 1 (Reuters) - Separating reality
from sentiment is often a challenge in commodity markets, and
Australia's government forecaster has made a solid effort to
present a sober picture that's at odds with the current gloom.
The latest quarterly outlook from the Bureau of Resource and
Energy Economics (BREE) forecasts Australia's commodity exports
will rise in both volume and value terms in the 2013/14 fiscal
year that started Monday.
While it's true that the growth rates expected aren't of the
order seen in the early years of the so-called commodity
super-cycle last decade, the outlook is far from the rhetoric of
a boom that's gone bust, or is about to.
Australia is the world's largest exporter of iron ore and
coal, and is likely to become the biggest shipper of liquefied
natural gas by 2020 once the seven plants currently under
construction are completed.
Australia's output of metals and other minerals is expected
to rise 4.7 percent in 2013/14, while energy production will
gain 3.1 percent, according to the quarterly outlook published
June 26 by the bureau.
In value terms, the forecast gains look more impressive with
metals and minerals expected to increase 12.6 percent to A$119.2
billion ($109.2 billion) and energy by 9.5 percent to A$77.4
The caveat here is that much of the gain in value is due to
a forecast 8.7 percent decline in the Australian dollar over
2013/14 from the prior fiscal year, but even in U.S. dollar
terms both value and volumes are expected to increase.
In fact, the increase in Australian dollar terms may be
greater than what BREE assumes, given that the forecaster is
factoring in an average exchange rate of 94 U.S. cents to an
Australian dollar, which is higher than the prevailing 91.5 U.S.
Most currency analysts expect further declines for the
Australian dollar as economic growth in China moderates and the
U.S. currency strengthens as the Federal Reserve tapers its
But the main question to be asked of the BREE report is
whether the forecaster is justified in its optimism for
increasing export volumes for major commodities, given the
easing in Chinese demand growth.
CHINA DEMAND QUESTIONS
Iron ore is the single biggest commodity export from
Australia, and the bureau expects 610 million tonnes to be
shipped out in 2013/14 at a value of A$66.76 billion.
This would be a 14.4 percent gain in volume and a 16.5
percent jump in value, and on the surface appears at odds with
the current market assessment of China steel industry.
While Australia will have the capacity to increase exports,
the question is whether China, which consumes two-thirds of
global seaborne iron ore, will have the demand.
The bureau's assumption is that China's steel demand will
rise in the second half of 2013 and into next year on the back
of state-funded infrastructure construction.
This will boost China's iron ore import demand to 774
million tonnes in 2013 and 805 million in 2014, up from 745
million in 2012.
The bureau assumes largely steady import demand from the
European Union, Japan and South Korea.
On the supply side Brazil's exports are expected to rise
moderately in 2013 to 336 million tonnes from 327 million last
year, while India, formerly the world's third-biggest shipper,
is expected to export a mere 2 million tonnes, and turn to a net
importer by 2014.
This implies that virtually all of the increase in seaborne
iron ore demand will be met by Australia, and that this will
help keep prices relatively stable and around current levels.
Iron ore contract prices are forecast to average $112 a
tonne in 2013/14, while the current spot price is $116.50
The main risk to this forecast isn't around the supply side,
rather it's that China's steel demand won't accelerate, and
furthermore won't be able to absorb the current build-up in
inventories caused by mills still producing near record amounts
even as demand growth slackens.
Optimism on China is also behind the bureau's forecasts for
both coking and thermal coal.
Exports of coking coal, used for steel-making, are expected
to rise to 160 million tonnes in 2013/14 from 150 million the
prior year, while the average price is forecast at $160 a tonne.
Thermal coal shipments will rise to 190 million tonnes from
182 million, while the price will dip slightly to $92 a tonne
The problem here is that spot thermal coal at Australia's
Newcastle port, the Asian benchmark, dropped well
below the forecast level to trade at $78.87 a tonne on June 27,
while coking coal is also weaker at under $140 a tonne.
Weaker Chinese demand is largely behind the recent price
declines in both types of coal, so once again the bureau is
assuming China's economy will regain momentum.
However, the key point is probably that China doesn't have
to gain a lot of momentum to change the short-term gloom to
something more modestly positive.
The bureau assumes China will achieve its official target of
7.5 percent economic growth in 2013 and next year.
While the partial data on the economy, such as industrial
production and exports, suggest that China lost momentum in the
second quarter of 2013, there aren't widespread fears that China
will fail to achieve its target.
What the BREE report is ultimately saying is that if China
does manage to make its 7.5 percent economic growth target, then
commodity demand will rise moderately and prices will be largely
steady to slightly higher.
It also means that the fiscal year just ended was the real
weak spot for commodities and that the 2013/14 year will be a
return to growth.
Australia's minerals and energy exports are forecast at
A$196.6 billion in 2013/14, up a staggering 41 percent from what
was achieved in 2009/14 and 11.4 percent above 2012/13.
These aren't numbers that speak to the end of a boom, in
fact what they show is that the gains in commodity export
volumes and value have been consolidated.
(Editing by Himani Sarkar)