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COLUMN-Sober Australia commodity forecasts contrast with market gloom: Clyde Russell
07/01/2013 Email this story  |  Printable Version

--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 billion.

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. cents.

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 monetary stimulus.

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 <.IO62-CNI=SI>.

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 from $95.

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)


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