australian commodities

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australian commodities 06.1 march quarter

GPO Box 1563 Canberra 2601 Telephone +61 2 6272 2000 www.abareconomics.com ABARE is a professionally independent government economic research agency editor Andrew Wright ABARE project 1163

© Commonwealth of Australia 2006 Selected passages, tables and diagrams may be reproduced provided due acknowledgment is made

ISSN 1321-7844

contents

economic overview

5

commodity outlook to 2010-11

23

agriculture grains – wheat, coarse grains, oilseeds cotton sugar sheep – wool, lamb, mutton, live sheep meat – beef, pigs, poultry dairy

35 49 55 61 70 82

minerals and energy energy – oil, gas, uranium, thermal coal steel – iron and steel, iron ore, metallurgical coal, nickel gold metals – aluminium, copper, zinc

89 115 136 143

abare papers presented at Outlook 2006 Wine industry – strategic global directions and Australian outlook to 2010-11 Roger Rose and Wayne Gordon

162

Economic status of fisheries Paul Newton, Roslyn Wood, Stephanie Szakiel, Leanna Tedesco and Peter Gooday

175

Farm financial performance Peter Martin, Stephen Hooper, Myrsije Bilali, Phantipa Puangsumalee, Paul Phillips and Rhonda Treadwell

188

Multilateral trade reform – potential trade impacts of the Doha Round Roneel Nair, Daniel McDonald, Andrew Jacenko and Don Gunasekera

statisical tables abare management

australian commodities > vol. 13 no. 1 > march quarter 2006

209 221 258

3

economic over contents view

2006

> Jammie Contact Penm > +61>2+61 6272 2 6272 ???? 2030 > [email protected] > [email protected]

economic overview prospects for world economic growth, 2006 to 2011 Jammie Penm

> World economic growth is assumed to be 4.1 per cent in 2006, compared with an estimated 4.2 per cent in 2005. Over the medium term (to 2011), world economic growth is assumed to ease gradually to around 3.7 per cent a year. > Economic growth in China is expected to remain strong over the short to medium term. Continued growth in commodity demand in China is expected to provide support for commodity prices on world markets. > Economic performance in Australia is assumed to remain relatively robust, with growth of 3.0 per cent in both 2005-06 and 2006-07. Toward 2010-11, Australia’s economic growth is assumed to average around 3.3 per cent a year.

World economic outlook Relatively strong world growth in 2005 The global economy experienced robust growth in 2005, despite significant concerns about the impact of higher world oil prices. In the world’s largest economy, the United States, economic growth was strong in year average terms and is expected to strengthen in early 2006 after a temporary slowdown in late 2005. In China, economic growth remained robust, supported partly by a recovery in domestic demand. A shift in investment from some potentially overheating sectors to those experiencing bottlenecks suggests an improvement in resources allocation in China’s economy. While a gradual easing of economic growth is expected, economic performance in China is likely to remain robust in the next few years. In Japan and western Europe, signs of economic improvement emerged in the latter part of 2005. Economic activity in Japan strengthened, with gross domestic product rising year on year by 2.9 per cent in the September quarter 2005. In western Europe, a number of regional economies, including Germany and France, recorded a modest increase in economic growth in late 2005. Despite these improvements, concerns remain about the economic outlook for Japan and western Europe as the performance of these economies could be adversely affected by continued structural weakness, unemployment and high world oil prices. In other parts of the world, relatively strong economic growth continued in east and south east Asia, Latin America and the Middle East. While higher oil prices pushed up inflationary pressures in some south east Asian countries, a strong rise in world prices for minerals and energy commodities provided support for economic activity in Latin America and the Middle East. On average, world economic growth is estimated to have been around 4.2 per cent in 2005, compared with 5.1 per cent in 2004 and 4.0 per cent in 2003. australian commodities > vol. 13 no. 1 > march quarter 2006

5

economic over view Strong world growth supporting commodity prices In response to continued strong global economic growth, and hence higher commodity demand, prices of many minerals and energy commodities on world markets have risen markedly over the past twelve months. In the year ended January 2005, for example, spot prices (denominated in US dollars) for metals on the London Metal Exchange (LME) rose by around 30 per cent for aluminium and lead and 50 per cent for copper and zinc. Partly reflecting strong demand growth in China, negotiated contract prices for bulk commodities, such as iron ore and metallurgical coal, also rose sharply in 2005. Prospects for commodity prices are crucial to commodity producers and exporters. Currently, a major issue facing the commodity sector, especially minerals and energy industries, is whether strong growth in world commodity demand will continue, leading to strong world prices in 2006. Specifically, an important issue in the current commodity outlook is whether robust economic growth will continue in China. The emergence of China as a major world economy has attracted significant attention in recent years. Nowhere has China’s growing economic influence been felt more significantly than in world commodity markets (see the accompanying box). A substantial increase in China’s demand for base metals, minerals and fuels has contributed to the recent strong price rises on world markets for these commodities.

China in world commodity markets China’s importance in world commodity markets has increased significantly over the past decade. For many commodities, China’s import demand has risen significantly, leading to a marked increase in its share of world trade. With rapid industrialisation and relocation of manufacturing to China from developed countries, China’s importance in world commodity markets can be expected to continue to rise in the foreseeable future. The importance of China as a destination for Australian commodities has also risen markedly. Over the past decade, Australian exports of cotton, wool, steel, gold, base metals (copper, lead and zinc) and crude oil have risen significantly in volume terms. Earnings from Australian commodity exports to China (in 2005-06 dollars) averaged around $7.8 billion in the three years ended 2004-05. This compares with average earnings of $2.6 billion (also in 2005-06 dollars) achieved in the three years ended 1994-95. In 2004-05, China was the destination for an estimated 10 per cent of Australia’s agricultural exports, 17 per cent of minerals exports and 3 per cent of energy exports.

Farm products Driving China’s potential impact on world agricultural trade are the size and growth of China’s population and economy, China’s limited endowment of arable agricultural land and water and the policy stance taken by the Chinese Government. China accounts for around 22 per cent of the world’s population and is one of the world’s

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Selected Australian commodity exports to China

Wheat Wine Cotton Sugar Wool (greasy equivalent) Steel Aluminium Copper – refined – concentrates Gold Lead – refined – concentrates Zinc – refined – concentrates Oil Metallurgical coal Thermal coal

Three years ended 1994-95

Three years ended 2004-05

kt kL kt kt kt kt kt

835.0 70.0 14.0 344.3 185.7 43.0 13.7

895.3 1 450.0 57.1 233.8 216.7 852.7 64.5

kt kt kg

1.8 31.0 0.0

23.7 316.3 4 503.0

kt kt

0.5 0.0

0.4 97.4

kt kt ML Mt Mt

0.3 8.8 236.0 0.4 0.4

9.8 216.4 1 606.7 2.5 2.7

2 615

7 762

Commodity exports to China (in 2005-06 dollars) $m

continued … australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view

China in world commodity markets

continued

largest and most rapid growing economies. However, it has only 10 per cent of the world’s total cultivated area and is facing increased difficulties in securing water for agricultural purposes. China has so far maintained approximate self-sufficiency in agricultural products overall, in the sense that exports have been approximately matching imports. With agricultural imports of around US$25 billion a year, China has been the world’s fourth largest importer after the European Union, the United States and Japan. China is a large country with high levels of agricultural production and consumption relative to the quantities of many products traded internationally. Consequently, even relatively small changes in the balance between China’s production and consumption can have marked effects on international agricultural trade and prices. In recent years, China’s imports of agricultural products have been

equivalent to around 11 per cent of China’s agricultural production. Most of China’s food and natural fibre supplies have been domestically produced and the amounts traded for most products have generally been small relative to China’s large domestic use. However, there have been some important exceptions, such as wool and soybeans. For wool, imports have constituted about 40–50 per cent of total use, while imports of soybeans have risen rapidly since 1995 from initially low levels to now around 60 per cent of domestic use. For both wool and soybeans, China now accounts for a large share of world imports, being by far the largest importer of wool and having recently displaced the European Union as the largest importer of soybeans. The most prominent food products in which China has been a net exporter include cereals, prepared meat and

Importance of China in world commodity markets Three years ended 1995

Three years ended 2005

Share of world Production Consumption Cotton Dairy Oilseeds Sugar Wheat Wool Copper – concentrates – refined Lead – concentrates Oil Steel Zinc – concentrates

Beef and veal Coarse grains Lamb Wine Aluminium Gold Lead – refined Metallurgical coal Thermal coal Zinc – refined

Share of world Imports

Production Consumption

Imports

%

%

%

%

%

%

23.6 1.3 15.9 5.1 18.7 8.7

24.5 1.3 15.6 8.5 19.2 na

3.0 0.6 –2.4 0.8 5.7 24.3

24.4 4.0 15.5 7.4 15.4 16

32.2 4.0 21.4 9.1 17.4 na

18.6 3.3 28.8 3.1 2.0 21.1

4.0 7.4 13.5 4.9 12.9 11.9

na 8.0 na 4.5 15.7 na

2.6 4.2 –2.4 –0.3 8.5 –2.7

4.3 11.9 28.1 4.6 26.5 21.0

na 18.9 na 7.6 27.6 na

18.2 18.4 32.3 4.0 6.7 7.8

Production Consumption

Exports

Production Consumption

Exports

%

%

%

%

%

%

5.0 13.4 10.3 2.4 7.5 5.2 7.6 25.7 34.6 11.8

4.9 12.9 na 1.1 7.5 na 5.3 25.3 33.9 8.6

2.4 6.0 na 0 –2.1 na 7.0 2.2 6.3 7.1

10.8 14.1 24.1 1.4 19.5 8.2 23.2 39.8 35.8 23.5

12.6 14.8 na 1.0 18.4 7.2 17.0 38.2 34.2 21.4

0.8 8.0 na 0 2.4 na 24.7 3.7 13.7 5.9

na Not available.

australian commodities > vol. 13 no. 1 > march quarter 2006

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economic over view

China in world commodity markets

continued

fish, vegetables, preserved food and seafood. With the exception of cereals, the main exports have been of items that are either partly processed or labor intensive farm products. This mainly reflects China’s comparative advantage in labor intensive products in world trade. China’s increasing and changing pattern of consumption of agricultural products — underpinned by population growth, significant income growth and increasing urbanisation — has the potential to have a significant impact on world agricultural trade. This is expected to provide opportunities for exporters of agricultural products on world markets, including Australia, in the years to come.

Mineral resources Strong growth in China’s economy has had a significant impact on global consumption of mineral resources. Industrial production has been growing strongly in China, averaging around 13 per cent a year over the past ten years, compared with an OECD average of just 2.1 per cent a year over that period. As a result, China now rivals the United States as the world’s principal consumer of mineral resources. Through rapid and sustained strong economic growth, China has become one of the world’s major consumers of metals and metalliferous minerals, such as steel, aluminium and base metals. China has also established its position as a major producer of these commodities. For aluminium and base metals, China has been importing significant amounts of alumina, metal ores and concentrates which are refined for domestic consumption or exports. These developments have resulted in China’s emergence as an important participant in world markets for mineral resources with the ability to significantly affect world prices through its domestic production and trade decisions. In the recent past, market speculation about

when, or if, China intends buying or selling metals and metalliferous minerals has been a significant factor in influencing short term price movements. China is the world’s second largest consumer of primary energy after the United States. In recent years, China’s energy sector, including growth in energy demand and the share of different fuels in total energy consumption, has undergone major transformation as a result of the effects of significant progress of industrialisation and continued strong economic growth. For example, coal consumption in China, which declined between 1997 and 1999, has reverted to strong growth since 2003. Oil demand is also burgeoning on the basis of strong growth in fuel oil consumption for electricity generation and a significant increase in transport activity. Expanding gas supply infrastructure has also started which will underpin increases in gas consumption in the near future. At the same time, China’s mineral resources sector is gradually becoming more commercially oriented, with a greater proportion of supply priced through direct negotiation between buyers and sellers. For example, China’s government recently indicated its intention to end domestic price controls on coal used for power generation, allowing power companies to negotiate their own prices. Continued strong economic growth, industrialisation and urbanisation in China are putting pressure on domestic mineral resources. This has the potential to make China a strategically important player in global mineral resources markets and to provide increased export opportunities for Australia’s minerals and energy industries. More discussions on the short to medium term effects of China’s economic developments on Australian commodity exports are presented in the individual notes in this issue.

World economic growth to remain robust in 2006 World economic growth is expected to remain robust in 2006. Partial indicators released recently have provided support for this assessment. In the largest world economy, the United States, the pace of economic expansion in 2006 in year average terms is expected to be marginally lower than that achieved in 2005. As the Federal Reserve is expected to continue to tighten monetary policy to prevent a significant increase in inflationary pressures, economic growth in the United States is expected to slow to a level that is more consistent with its medium term potential of around 3.3 per cent by late 2006 and early 2007. In China, economic growth is expected to remain relatively strong in 2006. Based on its first national economic census information, China’s government recently revised upward its estimate of gross domestic product in 2004 by 16.8 per cent. Given this upward revision, the levels of investment and savings in China (as proportions of gross domestic product) are now looking more sustainable on a longer term basis. 8

australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view While signs of economic improvements are emerging in Japan and western Europe, economic growth in these countries/regions is expected to be relatively modest in the short term. In the principal economies of east and south east Asia, including Chinese Taipei, Thailand, Malaysia and Indonesia, economic performance is assumed to remain relatively robust in 2006. Continued strong economic growth in the United States and China is expected to provide support for economic performance in this region. In other parts of the world, economic growth is expected to remain strong in Latin America and the Middle East. In other emerging markets, including the Russian Federation, the Ukraine and eastern Europe, economic activity is assumed to continue to strengthen in the short term.

World economic growth and real WTI oil prices Real WTI oil price

60

6

50

5

40

4

30

3

20

2

10

World economic growth

2006

1 %

US$

1991 1995 1999 2003 2007 2011

Key world macroeconomic assumptions Unit

2004

2005

2006 a

2007 a

2008 a

2009 a

2010 a

2011 a

Economic growth b OECD United States Japan Western Europe Germany France United Kingdom Italy Korea, Rep. Of New Zealand Developing countries Non-OECD Asia South East Asia c China d Chinese Taipei India Latin America Middle East Russian Federation Ukraine Eastern Europe

% % % % % % % % % %

3.1 4.2 2.3 2.0 1.6 2.0 3.2 1.2 4.6 4.4

2.5 3.6 2.6 1.1 1.1 1.5 1.7 0.2 4.0 2.5

2.7 3.5 2.4 1.8 1.7 2.0 2.1 1.2 4.9 1.8

2.5 3.3 2.0 1.6 1.5 1.8 2.2 1.0 4.5 2.5

2.4 3.3 1.8 1.6 1.3 1.6 2.5 1.0 4.0 3.0

2.4 3.3 1.5 1.5 1.3 1.6 2.3 1.0 4.0 3.0

2.4 3.3 1.5 1.5 1.3 1.6 2.3 1.0 4.0 3.0

2.4 3.3 1.5 1.5 1.3 1.6 2.3 1.0 4.0 3.0

% % % % % % % % % % %

7.2 8.1 6.4 10.1 6.1 6.9 5.6 5.5 7.2 12.5 6.5

6.5 7.5 5.0 9.9 3.8 7.5 4.0 6.0 6.4 6.0 4.5

6.0 6.9 4.9 8.7 4.0 7.0 4.0 5.5 5.5 5.5 4.3

5.7 6.6 4.8 8.3 4.0 6.5 4.0 5.0 5.0 5.0 4.0

5.6 6.4 4.7 8.0 4.0 6.5 3.8 5.0 4.5 4.0 4.0

5.5 6.4 4.7 8.0 3.8 6.5 3.6 4.5 4.0 4.0 4.0

5.5 6.4 4.6 8.0 3.8 6.5 3.5 4.5 4.0 4.0 4.0

5.5 6.4 4.6 8.0 3.8 6.5 3.5 4.5 4.0 4.0 4.0

World e

%

5.1

4.2

4.1

3.9

3.8

3.7

3.7

3.7

Industrial production b OECD

%

3.6

2.3

2.8

2.4

2.4

2.4

2.4

2.4

Inflation b United States Interest rates US prime rate g

%

2.7

3.3

3.0

2.5

2.0

2.0

2.0

2.0

% pa

4.3

6.2

7.4

7.5

7.2

7.0

7.0

7.0

US exchange rates h Yen/US$ Euro/US$

Yen Euro

108 0.80

110 0.80

117 0.84

118 0.86

120 0.90

120 0.90

120 0.90

120 0.90

a ABARE assumption. b Change from previous period. c Indonesia, Malaysia, the Philippines, Singapore, and Thailand. d Excludes Hong Kong. e Weighted using 2004 purchasing power parity (PPP) valuation of country gross domestic product by the IMF. g Commercial bank lending rates to prime borrowers in the United States. h Average of daily rates. Sources: Australian Bureau of Statistics; International Monetary Fund; Organisation for Economic Cooperation and Development; Reserve Bank of Australia; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

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economic over view Medium term economic growth to be marginally lower In preparing this set of commodity projections, world economic growth is assumed to be 4.1 per cent in 2006, before easing to 3.9 per cent in 2007. Over the medium term (to 2011), world economic growth is assumed to ease marginally to an annual rate of 3.7 per cent. The assumed average growth in the world economy over the medium term is similar to the annual average achieved over the five years ended 2005.

Important issues to world commodity markets While world economic growth is assumed to be 4.1 per cent in 2006, 3.9 per cent in 2007 and 3.7 per cent a year over the medium term, there are a number of issues that could have important implications for world commodity markets, especially over the medium to longer term.

Sustainability of US trade and current account deficits Over the past few years, the trade and current account imbalances in the United States have increased significantly. The US trade deficit, seasonally adjusted, was around US$65.7 billion in December 2005, a year on year rise of around 20 per cent. For 2005 as a whole, the trade deficit was around US$726 billion. This compares with a deficit of US$618 billion in 2004. In the September quarter 2005, the US current account imbalance, seasonally adjusted, increased year on year by 17 per cent to a deficit of US$196 billion (exceeding 6 per cent of gross domestic product). In the first nine months of 2005, the US current account deficit rose year on year by 23 per cent from the same period a year earlier. The increases in both US trade and current account deficits have generated considerable concerns in financial markets about their sustainability. The significant increase in the US trade deficit means that strong US consumer demand is providing support for economic performance in other parts Hourly compensation costs for labor in of the world. To sustain the increase in household spending, manufacturing however, US consumers have been running down savings or increasing their borrowings. In the September quarter 2001 2002 2003 2005, for example, 16.6 per cent of US household disposUS$/hr US$/hr US$/hr able income was used for servicing debt. A significant rise OECD in house prices and relatively low interest rates have so far United States 20.29 21.11 21.97 enabled US consumers to take on more debt. Japan 19.25 18.49 20.09 The risk in this situation is that interest rates in the United Germany 22.54 24.34 29.91 France 15.65 17.12 21.13 States have been rising. If US interest rates were to increase EU-15 18.19 19.80 24.05 substantially in the short term, household consumption in the Australia 13.31 15.50 20.05 United States could be significantly affected, leading to a Korea, Rep. of 7.69 9.00 10.28 decline in domestic and import demand. This in turn could OECD average 14.69 15.32 17.79 adversely affect export and economic performance in other Asia parts of the world. Chinese Taipei 6.03 5.73 5.84 A substantial increase in the current account deficit in the Singapore 7.28 6.90 7.41 United States could rekindle downward pressure on the value China na 0.56-0.67 na of the US dollar, especially against other international floating Latin America currencies (including the Australian dollar). It could also Brazil 2.94 2.53 2.67 Mexico

2.51

2.60

2.48

Source: Foreign Labor Statistics (2005).

10

australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view aggravate pressures for a revaluation of managed exchange rates of developing countries, especially those of the Asian economies. While a significant decline in the value of the US dollar can be expected to help correct the US trade and current account imbalances, the gain for the US export and import competing industries would be a loss for the economies of its trading partners. A sharp depreciation of the US dollar could also adversely affect US economic performance. International investors could lose confidence in the US dollar, leading to a significant reduction in capital inflows, or even capital outflows, in that economy. Under this scenario, interest rates in the United States would increase significantly, adversely affecting its economic performance. A marked weakening of economic growth in the United States would pose a threat to economic prospects elsewhere in the world.

China’s longer term growth potential As discussed earlier, an important factor that can significantly influence world economic prospects and prices on world commodity markets is economic performance in China. There has been significant interest in the prospects for economic growth in China, especially over the medium to longer term. China’s strong economic performance in recent years can be attributed, to a significant extent, to relatively low labor costs and a substantial increase in foreign direct investment. Average annual growth 1870 –1913 Based on the estimates released by the US Bureau of Labor Statistics, the hourly (compensation) cost of a factory worker United Kingdom 5 in China was around US56–67c in 2002. This compares United States with equivalent costs of slightly over US$21 in the United 4 States and over US$15 for the OECD average. While China’s manufacturing hourly wages are around 3 per cent 3 of the US level, the International Labor Organisation estimates 2 that China’s manufacturing labor productivity is around 10 per cent of that in the United States. 1 China’s economic growth and the nature of its industrialisation have led to a significant increase in its % demand for resources. On the other hand, relatively low costs Economic Labor Employment Capital of production in China and other emerging economies have activity productivity stocks helped to ease upward pressure on prices of manufactured goods on international markets. In many ways, the emergence of China as a major world World income share economy appears to resemble the economic development of the United States in the late 19th century and the early 1870 20th century. Because of significantly lower labor costs Other 7% United States 9% relative to major European countries at that time, the United China United Kingdom 8% States achieved markedly higher growth in investment and 17% Other Europe 36% employment, leading to that country becoming today’s world 1913 economic powerhouse. Other Other 9% United States Based on the estimates provided by the OECD, for Asia 23% 19% China 11% example, annual investment and employment growth in the United Kingdom United States averaged around 5.5 per cent and 2.3 per Other 8% cent respectively in the period 1870 to 1913, significantly Asia 15% higher than 1.7 per cent and 1.0 per cent achieved respecOther Europe 38% tively in the United Kingdom. australian commodities > vol. 13 no. 1 > march quarter 2006

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economic over view Significantly higher economic growth in the United States over that period led to a marked increase in the importance of the United States in the world economy. Between 1870 and 1913, the United States’ share of world income more than doubled from around 9 per cent to 19 per cent. This compares with an increase from an estimated 44 per cent to 46 per cent for Europe as a whole over the same period. Given its competitive labor costs, substantial labor supply and rapid growth in foreign direct investment, China has the potential for a similar achievement over the next few decades. On a purchasing power parity basis, China accounted for around 15 per cent of world income in 2005. If significant foreign direct investment and productivity growth continue in China, it is not inconceivable that China’s share of world income could double toward 2050. However, China’s economic success is not guaranteed. China still requires significant structural reform, especially in its financial sector, legal system and state owned enterprises. If significant reform can be achieved, China will be able to sustain high economic growth into the medium to longer term. Otherwise, bottlenecks and capacity constraints will emerge and economic growth in China will inevitably slow down over the medium term.

Competition from Latin America Over the past several years, Latin American countries, especially Brazil, have emerged as major competitors for Australian exports, especially on world markets for agricultural products and mineral resources. Brazil, for example, is a major producer and exporter of iron ore, nickel, zinc, sugar, grains and oilseeds. Brazil has millions of hectares of undeveloped forests and grasslands with nutrient rich soils that could be transformed into agricultural land. The US Department of Agriculture estimates that more than 150 million hectares of land could be cleared without additional deforestation in the Amazon Basin. Brazil is also a major exporter of textiles and processed foods. An issue that has important implications for Australia’s commodity exports is the increase in Brazil’s competitiveness against Australian commodities on world markets. Measured by movements in the real bilateral exchange rate between Brazil and Australia (that is, the nominal bilateral exchange rate adjusted by inflation differential between the two countries), Brazil’s competitiveness in international markets has increased markedly since 1998. Movements in the real bilateral exchange rate of the Australian dollar against Brazil’s currency — the real — between 1985 and 1997 exhibited a consistent improvement in Australia’s competitiveness against Brazil on world markets. After the financial crisis in Brazil in 1998, which led to a sharp depreciation of its currency, Brazil’s competitiveness on international markets has improved Real Australian dollar against Brazil’s significantly. Between 1998 and 2004, for example, the real currency Quarterly, ended September 2005 Australian exchange rate against the Brazilian currency (the real) appreciated by around 120 per cent. The significant 160 improvement in Brazil’s competitiveness on world markets, if it continues, could have important implications for Australian 140 commodity exporters. 120 However, significant expansion in Brazil’s production and exports will be dependent on the continued development of 100 infrastructure, particularly internal waterways, roads and rail. 80 These developments will improve the prospects for producers in Brazil looking to extend into regions currently too far from 60 export terminals to be competitive. Significant investment index 2000=100 will also be required to improve production and manufacturing technology and storage and handling facilities. If these 1985 1990 1995 2000 2005 12

australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view improvements are achieved, the importance of Brazil as a major supplier on world commodity markets will increase markedly.

Higher oil prices and outbreaks of avian influenza pose downside risks In the short term, significant risks that could adversely affect world economic growth include a significant increase in world oil prices and the current outbreaks of avian influenza (or bird flu). These issues have been discussed in the December 2005 issue of Australian Commodities. For brevity, readers are referred to ‘Economic Overview’ in that issue for detail and the World Health Organisation for updates (www.who.net).

Economic prospects in the United States Following robust economic growth in 2004, economic activity in the United States remained relatively strong in 2005. The US economy is estimated to have grown by around 3.6 per cent in 2005, compared with growth of 4.2 per cent in 2004. Partial indicators released in early 2006 have provided signals of continued growth in the US economy. Activity in the retail sector remains strong, with retail sales (in volume terms) increasing year on year by 4.4 per cent in December 2005. Industrial production increased by 0.6 per cent in the same month, following growth of 0.8 per cent in November. The unemployment rate was relatively steadily at 4.9 per cent in December 2005. Since mid-2004, the US Federal Reserve has been tightening monetary policy in order to avoid a significant increase in inflationary pressures. The federal funds rate was at 4.5 per cent in mid-February 2006, compared with 1.0 per cent in the same period two years earlier. Monetary policy in the United States is likely to be tightened further in the short term, reducing the stimulus effects on the economy. A major issue in the US economic outlook is whether inflationary pressures will increase significantly as a result of continued strong economic growth and higher energy prices. Following a sharp rise of 1.2 per cent in September 2005, the consumer price index increased by 0.2 per cent in October, before declining by 0.6 per cent in November and a further 0.1 per cent in December. The main contributor to the falls in November and December was lower energy prices as a result of lower crude oil prices on world markets in late 2005. Notwithstanding the price declines in late 2005, gasoline prices have risen once again in early 2006. The national price of gasoline averaged around US$2.28 a gallon in midFebruary. This compares with an average of US$2.20 a gallon in late November, US$3.06 a gallon in the wake of Hurricane Katrina in late August and around US$1.90 a gallon in the same period a year earlier. If gasoline prices rise significantly in the near future, inflationary pressures in the US economy could increase significantly. The federal budget deficit declined to US$318 billion in the US financial year 2005 (October–September) from US$413 billion in 2004. In terms of gross domestic product, the federal budget deficit fell from 3.6 per cent in 2004 to 2.6 per cent in 2005. Based on the Congressional Budget Office information, the budget deficit is projected to increase to US$337 billion in financial year 2006. As a percentage of gross domestic product, the budget deficit is forecast to remain around 2.6 per cent in 2006. Economic growth in the United States is assumed to average around 3.5 per cent in 2006, before easing to 3.3 per cent in 2007.

Medium term outlook for the US economy Over the medium term, growth in the US economy is assumed to average around 3.3 per cent a year toward 2011. The assumed economic growth toward 2011 is higher than the australian commodities > vol. 13 no. 1 > march quarter 2006

13

economic over view average of 2.6 per cent over the five years ended 2005, but lower than the average of 4.1 per cent achieved in the five years ended 2000. As discussed earlier, there has been considerable concern about a significant increase in the trade deficit in the United States, especially the bilateral trade imbalance of the United States with China. The bilateral trade deficit of the United States with China was around US$16.3 billion in December 2005, the largest the United States exhibits with any single trading partner. For 2005 as a whole, the bilateral trade deficit with China totaled around US$202 billion, compared with a deficit of around $162 billion in 2004. One factor that has contributed to the widening trade imbalance in the United States is the monetary and fiscal stimulus in the economy. A return to the neutral stance of monetary policy in the near future and a continued reduction of fiscal deficit in the next few years would provide support for increased savings in the economy, contributing to a lowering of the trade imbalance over the medium term. On the other hand, if the fiscal deficit were to persist or even increase over the medium term, its effects on the trade and current accounts would continue. Under this scenario, there would be significant downward pressure on the US dollar, upward pressure on domestic interest rates and a crowding out of private investment, leading to weaker growth in economic activity. The prospects for US economic growth over the medium term will also depend on continued technological innovation and growth in productivity. Growth in US productivity is estimated to have increased from around 1.5 per cent a year between 1974 and 1995 to an average of 3.1 per cent between 1995 and 2004. The production and use of information technology was found to have accounted for a large share of the gains in productivity growth. Growth in US productivity is projected to average around 2.6 per cent a year over the next decade. Continued productivity growth will provide support for sustained economic growth. On the other hand, if technological progress and productivity growth slow significantly over the medium term, the annual average rate of economic growth that will be achieved toward 2011 could be markedly lower than currently assumed.

Economic performance in China Growth in China’s economy is estimated to have been around 9.9 per cent in 2005. This compares with the recently revised growth rate of 10.1 per cent in 2004. Economic growth in China is assumed to average 8.7 per cent in 2006 and 8.3 per cent in 2007. China has a large economy relative to other high growth emerging markets, including India, Brazil and the Russian Federation. China’s economy is more than twice the size of India’s and more than five times larger than those of Brazil and the Russian Federation. China’s economy is also more open than many emerging economies, with a lower average tariff on manufactured products. China’s strong trade and economic performance has resulted in significant international pressure for a substantial revaluation of China’s currency. In July 2005, China changed its foreign exchange regime to a so-called ‘managed’ float from being ‘pegged’ to the US dollar. After the announcement, China’s currency appreciated by around 2.1 per cent against the US dollar (from 8.28 to 8.11 yuan). Despite the change in China’s foreign exchange regime, international pressure for China to further revalue its currency has intensified. Critics have maintained that the revaluation in July was too small and that the ‘managed’ float has failed to operate effectively with the value of China’s currency remaining fairly stable since then. China’s government has reiterated its commitment to pursue a fully market based exchange rate, but only through a gradual process. 14

australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view China’s currency appreciated slightly further in early 2006 and was trading around 8.06 yuan against the US dollar in mid-February. Despite strong economic growth in China, considerable concerns remain over the possible impacts of income inequality between rural and urban regions. The income inequality has the potential to threaten social stability in China. China’s government has announced plans for significant expenditure on rural infrastructure, eduction and health care. To sustain high economic growth over the medium term, it will be important for China’s economy to balance its growth driver from exports to domestic demand. As the importance of China in world trade continues to grow, it will be difficult for China to sustain its rapid export growth. Over the past few years, there have been intensified negotiations between China and the United States and the European Union for issues about market access. In preparing this set of commodity projections, economic growth in China is assumed to average around 8.0 per cent a year over the medium term.

Economic activity in Japan and the Republic of Korea Japan Japan’s economy experienced a decade of stagnation after the bubble economy burst in the early 1990s. During the past ten years, Japan has shown signs of economic recovery on several occasions (usually spurred by a significant increase in exports), but only to fall back into sluggish economic activity due mainly to weak consumer spending. Over the past six months, Japan has once again exhibited the potential for strong economic recovery. Industrial production, for example, rose year on year by 3.8 per cent in December 2005 and retail trade, in volume terms, increased year on year by 0.9 per cent in November. The latest surveys suggest that there has been an improvement in business confidence, with the Nikkei 225 stock market index rising to a new five-year high in early February, around 42 per cent above its level at the start of 2005. The unemployment rate, seasonally adjusted, was at 4.4 per cent in December 2005, compared with 4.5 per cent in the same month a year earlier. Following falling consumer prices over more than five years, the core inflation (excluding fresh foods) increased slightly by a year on year rate of 0.1 per cent in December 2005. However, the headline inflation continued to fall, with a year on year decline of 0.1 per cent in the same month. One major factor for Japan’s economic stagnation in the late 1990s and early 2000s was the weakness in its banking system. In recent years, considerable progress has been made in addressing this issue, which has put Japan in a better position to achieve sustained economic growth. In particular, the authorities have strengthened the regulatory environment for financial institutes, and this has placed pressure on the financial sector to deal more forcefully with nonperforming loans. Over the past few years, the number of nonperforming loans has fallen by more than half among the major banks (but less for regional banks). There has also been a decline in corporate debt levels, leading to higher corporate profits. Economic growth in Japan is assumed to be 2.4 per cent in 2006 and 2.0 per cent in 2007, compared with an estimated growth rate of 2.6 per cent in 2005. Over the past decade, Japan has implemented significant fiscal and monetary stimulus to support economic growth. Official interest rates have been reduced to close to zero. Japan has the largest fiscal imbalance (as a percentage of gross domestic product) in developed countries, with the budget deficit estimated to exceed 6 per cent of gross domestic product in australian commodities > vol. 13 no. 1 > march quarter 2006

15

economic over view Japanese financial year 2005 (April—March). Japan’s public sector debt is forecast to reach around 170 per cent of gross domestic product by the end of Japanese financial year 2005. Fiscal policy in Japan continues to face formidable challenges. It involves not only questions about the extent of continued support to economic activity but also the balance to be struck between short term requirements and medium term consolidation. The extent to which Japan is able to return to sustained economic growth over the medium term will depend on the progress of reforms to its economic structure. This is especially the case when account is taken of the presence of an aging and declining population and low productivity growth in the nontraded sector. Japan’s working age population has been declining since 1998 and little growth in Japan’s total population is projected between 2005 and 2010 (United Nations 2005). Over the medium term, Japan’s source of economic growth relies on productivity growth, which is dependent on the progress of economic restructuring. In manufacturing, firms appear to be progressing in restructuring with a number of large Japanese enterprises among the most productive in the world. However, the lack of competition has discouraged and slowed reforms in businesses oriented to the domestic market. Facing an aging population, Japan requires substantial economic restructuring of the nontraded sector. Slow progress of structural reform will result in weakness in economic performance and further pressure on the fiscal position. Reflecting an aging population and the need for significant economic restructuring, economic growth in Japan is assumed to average around 1.5 per cent a year out to 2011.

Republic of Korea After a weaker performance in the first half of 2005, economic growth in the Republic of Korea strengthened in the second half of 2005. Real gross domestic product increased year on year by 5.2 per cent in the December quarter 2005. For 2005 as a whole, economic growth in Korea is estimated to have averaged 4.0 per cent, compared with growth of 4.6 per cent in 2004. Looking forward, Korea’s economic growth is expected to strengthen in 2006, supported by a recovery in domestic demand. In spite of the improved growth outlook, a number of risks, including higher oil prices, a possible weaker US dollar and political instability could weaken economic performance in the short term. Korea’s economy is particularly vulnerable to higher world oil prices, as almost all petroleum products are imported. Economic growth in Korea is assumed to be 4.9 per cent in 2006. Toward the medium term, economic growth in Korea is assumed to ease to 4.0 per cent a year.

Outlook for western Europe Following modest growth in 2004, economic growth in western Europe weakened in 2005. Economic growth in western Europe is estimated to have averaged around 1.1 per cent in 2005, compared with growth of 2.0 per cent in 2004. Looking forward, partial indicators released recently suggest that economic activity is likely to strengthen, albeit at a modest rate. The unemployment rate in the euro zone declined to 8.4 per cent in December 2005. This compares with 8.8 per cent in the same month a year earlier. Retail trade, in volume terms, grew year on year by 0.8 per cent in December. Industrial production rose year on year by 2.6 per cent in November. For western Europe as a whole, economic growth is assumed to be around 1.8 per cent in 2006 and 1.6 per cent in 2007.

16

australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view In the largest regional economy, Germany, domestic demand has been relatively weak with retail trade, in volume terms, falling year on year by 1.6 per cent in December 2005. In contrast, growth in exports has been the major contributor to economic growth. Industrial production rose year on year by 3.4 per cent in December. Economic growth in Germany is assumed to increase from an estimated 1.1 per cent in 2005 to 1.7 per cent in 2006, before easing to 1.5 per cent in 2007. Economic growth in France also weakened in 2005, but was stronger than some other major regional economies, including Germany and Italy. In contrast to Germany, the main contributor to economic growth in France has been higher domestic demand. Partial indicators released recently suggest that this trend is likely to continue in the short term. While industrial production declined year on year by 1.3 per cent in November 2005, retail trade (in volume terms) rose year on year by 2.1 per cent in December. A major challenge in the short term is to stimulate growth in exports to support economic activity. The unemployment rate was at 9.5 per cent in December 2005, compared with 10 per cent in the same month a year earlier. Economic growth in France is assumed to be 2.0 per cent in 2006 and 1.8 per cent in 2007, compared with an estimated growth rate of 1.6 per cent in 2005. The relatively weak growth performance in western Europe over the past few years indicates the need to increase productivity growth through structural reform. The areas requiring substantial efforts include restructuring labor markets and healthcare and pension systems. While some healthcare and pension reforms have been introduced, further restructuring is needed as fiscal pressures from an aging population set to accelerate over the medium term. A key issue to raise the potential growth rate in western Europe is labor market reform. While some progress has been made, such as Agenda 2010 in Germany, more efforts are needed to increase labor productivity and reduce unemployment. While priorities vary across countries, reforms that will improve economic performance include greater flexibility in wage bargaining, reducing incentives for early retirement and re-examination of minimum wages. Structural reform and further economic integration will be important for growth prospects in the region. If successful, productivity growth, and hence the potential rate of economic growth, will increase in the region. Otherwise, economic underperformance will continue. Economic growth in western Europe is assumed to average around 1.5 per cent a year over the medium term.

Economic growth in east and south east Asia In non-OECD Asia, economic growth weakened in 2005 from a recent high in 2004. Inflationary pressures have increased markedly in a number of regional economies, due largely to the impact of higher oil prices. In response, interest rates in many regional economies have been on the rise. Higher interest rates have the potential to adversely affect economic growth in the region. In Thailand, for example, consumer prices rose year on year by 5.9 per cent in January 2006, compared with rises of 4.5 per cent in 2005 and 2.7 per cent in 2004. In Indonesia, annual inflation was running at 17 per cent in January 2006, compared with 7.3 per cent in the same month a year earlier. In response, Bank Indonesia raised the official interest rate six times in the second half of 2005. In Malaysia, australian commodities > vol. 13 no. 1 > march quarter 2006

Economic growth in Asia

2005 2006 2007

8 6 4 2 % Thailand

Malaysia Singapore Korea, Chinese Indonesia Philippines China Rep of Taipei 17

economic over view consumer prices rose year on year by 3.5 per cent in December 2005, compared with average inflation of 1.4 per cent in 2004. Looking forward, economic growth in the region is expected to remain relatively robust, despite continued high world oil prices. Growth in export demand from the United States, China and Japan is expected to provide support for economic growth in this region. For nonOECD Asia as a whole, economic growth is assumed to average around 6.9 per cent in 2006, compared with an estimated 7.5 per cent in 2005. Toward 2011, economic growth in the region is assumed to ease to around 6.4 per cent a year. Chinese Taipei’s economy is estimated to have grown by 3.8 per cent in 2005, compared with 6.1 per cent in 2004. Partial indicators released recently suggest that economic growth is recovering with industrial production increasing year on year by 9.5 per cent in December 2005. Despite higher world oil prices, inflationary pressures have been relatively low with consumer prices increasing by 2.2 per cent in the same month. Economic growth in Chinese Taipei is assumed to be 4.0 per cent in both 2006 and 2007, before easing gradually to an annual rate of 3.8 per cent over the medium term. In Malaysia, the manufacturing sector has benefited from strong export demand. Industrial production increased year on year by 4.2 per cent in December 2005. The trade surplus was around US$25.6 billion in the first eleven months of 2005. Economic growth in Malaysia is assumed to be 5.2 per cent in both 2006 and 2007, before easing to 4.5 per cent a year toward 2010. For south east Asia as a whole, economic growth is assumed to be 4.9 per cent in 2006 and 4.8 per cent in 2007, before easing gradually to 4.6 per cent a year over the medium term. Over the past few years, there have been international pressures for greater flexibility in south east Asian currencies, especially in terms of appreciation against the US dollar. Trade surpluses in these countries, especially with the United States, have been significant, and this has led to many south east Asian countries making substantial effort to stabilise their nominal exchange rates. The tension between the objectives of preventing inflationary pressures and nominal exchange rate stability remains a key issue across the region. Looking forward, trade performance is likely to remain relatively strong in the region. Against this background, greater exchange rate flexibility will be increasingly desirable and more consistent with longer term economic fundamentals.

Economic prospects in Australia

Australian economic indicators Economic growth

Inflation rate

Prime lending rate

8 6 4 2 % 2005-06

18

2006-07

Average 2007-2011

The outlook for the Australian economy remains positive, with an expected increase in economic growth in 2005-06 in year average terms. Real gross domestic product increased year on year by 2.6 per cent in the September quarter 2005, following a rise of 2.7 per cent in the June quarter. In quarterly seasonally adjusted terms, the increase in economic activity in the September quarter reflected positive contributions from household consumption and private business investment. However, the effects were partially offset by negative contributions from public investment, inventory changes and exports of goods and services. Australia’s trade account, seasonally adjusted, recorded a deficit of around $4.3 billion in the September quarter, marginally higher than the deficit in the previous quarter. The australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view current account deficit, seasonally adjusted, was around $13.5 billion in the September quarter. This compares with a deficit of $12.0 billion in the June quarter. Looking forward, economic growth in Australia is expected to remain robust. Reflecting strong world demand for mineral resources, the Australian economy is expected to benefit from higher commodity export earnings. While housing activity and growth in consumer spending could remain modest, business investment expenditure, especially in mineral resources related industries, is likely to rise more significantly, providing support for growth in general economic activity. Economic growth in Australia is assumed to be 3.0 per cent in both 2005-06 and 2006-07. Over the medium term, the Australian economy is assumed to grow at an average rate of around 3.3 per cent a year.

Australian export volumes Quarterly, ended September 2005 1000 Manfacturing 800 600

Services

Mineral resources

400 200

Rural

index average 1974-75=100

1975 1980 1985 1990 1995 2000 2005

Inflation Australia’s inflationary pressures eased slightly in late 2005, with the consumer price index rising year on year by 2.8 per cent in the December quarter, compared with a rise of 3.0 per cent in the September quarter. Contributing most to the increase in the December quarter were rises in vegetables, fruit and domestic holiday travel and accommodation. Partially offsetting these increases were falls in the cost of pharmaceuticals and audio, visual and computing equipment. Looking forward, other price indexes released recently suggest that modest inflationary pressures are likely to continue in the remainder of 2005-06. For example, the producer price index for final commodities increased year on year by 3.0 per cent in the December quarter 2005, compared with a rise of 3.4 per cent in the September quarter. While the domestic component increased year on year by 3.8 per cent, this was partially offset by a decline of 1.1 per cent in the imports component. Australia’s inflation rate is assumed to be 3.0 per cent in 2005-06, before easing to 2.5 per cent in 2006-07. Over the medium term, annual inflation in Australia is assumed to be around 2.5 per cent.

Key macroeconomic assumptions for Australia Unit

Economic growth bc % % Inflation b % pa Interest rates c Nominal exchange rates d US$ – US$/A$ Trade weighted index index for A$ e

2003 -04

2004 -05

2005 -06 a

2006 -07 a

2007 -08 a

2008 -09 a

2009 -10 a

2010 -11 a

4.0 2.4

2.3 2.4

3.0 3.0

3.0 2.5

3.5 2.5

3.3 2.5

3.3 2.5

3.3 2.5

8.7

8.9

9.1

9.1

9.0

8.7

8.7

8.7

0.71

0.75

0.74

0.73

0.71

0.68

0.66

0.65

61.0

63.0

64.0

63.0

61.0

58.0

57.0

56.0

a ABARE assumption. b Change from previous period. c Prime lending rate to large businesses. d Average of daily rates. e Base: May 1970 = 100. Sources: Australian Bureau of Statistics; Reserve Bank of Australia; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

19

economic over view Short term direction of the Australian dollar The Australian dollar has exhibited considerable volatility both on a trade weighted basis and against the US dollar over the past year. During the first half of 2005, the Australian dollar depreciated gradually against the US dollar and the Japanese yen. The value of the Australian dollar declined from US80c and ¥83 in early March to US75c and ¥81 in early June. Against the euro, the Australian dollar appreciated marginally from 0.60 euros in early March to 0.61 euros in early June. The Australian dollar depreciated further against the US dollar in the second half of 2005, before a partial reversal in early 2006. Over the same period, the Australian dollar appreciated against the Japanese yen, but remained relatively stable against the euro. The Australian dollar was trading around US74c, ¥87 and 0.62 euros in mid-February 2006, compared with US72c, ¥85 and 0.61 euros in late December 2005. In the first eight months of 2005-06, the Australian dollar is estimated to average around US75c, ¥86 and 0.62 euros. On a trade weighted basis, the Australian dollar is estimated to average around TWI 64 in this period. This compares with an average of TWI 63, US75c, ¥80 and 0.59 euros in 2004-05. One factor that has contributed markedly to the recent movements in the Australian dollar is the strength in the US Australia’s terms of trade dollar against other international currencies. The US dollar Quarterly, ended September 2005 was trading around ¥119 and 0.83 euros in mid-February 2006. This compares with ¥108 and 0.81 euros in early 120 June and ¥104 and 0.75 euros in early March. The recent appreciation of the US dollar mainly reflects 110 changing market expectations on movements in US interest 100 rates. As discussed earlier, US monetary authorities are 90 expected to continue to tighten monetary policy in order to prevent a significant rise in inflationary pressures. 80 Despite the downward pressure of a stronger US dollar 70 on the Australian exchange rate, a factor that has provided support for the Australian dollar is movements in Australia’s index terms of trade, especially a significant increase in prices 1960 1970 1980 1990 2000 of mineral resources on world markets. Australia’s terms of trade increased year on year by around 12 per cent in the September quarter 2005, following a rise of around 10 per Australia’s real exchange rate cent in the same period a year earlier. As a result, Australia’s Quarterly, ended September 2005 real exchange rate has also risen markedly. In the short term, movements in the Australian exchange 140 rate are likely to continue to be influenced by the factors mentioned above. Interest rate differentials between Australia 130 and the major world economies are expected to affect move120 ments in the Australian dollar. The main factor affecting Australian interest rates will be the outlook for economic growth 110 and inflation. Given modest inflationary pressures and robust 100 economic growth in Australia, Australia’s prime lending rates are assumed not to increase significantly. Australia’s prime 90 lending rates are assumed to average 9.1 per cent in both 2000 =100 2005-06 and 2006-07, compared with 8.9 per cent in 2004-05. 1980 1985 1990 1995 2000 2005 20

australian commodities > vol. 13 no. 1 > march quarter 2006

economic over view In contrast, US interest rates are assumed to increase further in 2006, leading to a narrowing of the interest rate differential between Australia and the United States. The US prime lending rate is assumed to average around 7.4 per cent in 2006, compared with 6.2 per cent in 2005. Higher interest rates in the United States are expected to provide support for a higher value of the US dollar against international floating exchange rates, including the Australian dollar. From an historical perspective, the value of the Australian dollar has been associated with changes in Australia’s terms of trade and hence movements in commodity prices on world markets. In response to the outlook for a gradual easing of world economic growth, prices of some Australian commodities on world markets (in US dollar terms) are forecast to average lower in the next few years. This could place downward pressure on the Australian dollar, especially in the latter part of 2006-07. Taking the above into account, the Australian dollar is assumed to average around US74c and TWI 64 in 2005-06 and US73c and TWI 63 in 2006-07. There is considerable uncertainty surrounding the outlook for the Australian dollar. This is because movements in the Australian dollar can be significantly influenced by changes in sentiment in financial markets, leading to strong volatility in the Australian exchange rate. As discussed earlier, the Australian dollar fluctuated from a high of US80c in early March to a low of US72c in late December in the past year. Since the floating of the Australian dollar in December 1983, the Australian currency has had an average fluctuation range of around US10 cents a year.

Australian dollar assumptions over the medium term Over the medium term, it is reasonable to assume that movements in the Australian exchange rate will continue to be influenced by Australia’s terms of trade, interest rate differentials and economic performance in Australia relative to the major world economies. Toward 2010-11, Australia’s real prime lending rates are assumed to average around 6.2 per cent, similar to that averaged in the five years ended 2004-05. The differential with real lending rates in the Untied States is assumed to narrow from around 2.0 percentage points currently to slightly over 1.0 percentage point by 2010-11. Consistent with the assumption of moderating world economic growth, Australia’s terms of trade are projected to ease gradually from the current high to a level that is more consistent with the historical trend. Toward the end of the outlook period, the Australian dollar is assumed to depreciate both against the US dollar and on Australian exchange rate a trade weighted basis. By 2010-11, the Australian dollar is assumed to average around US65c and TWI 56. The assumed movements in the Australian exchange rate 0.8 toward 2010-11 are also based on underlying assumptions that, in Australia, the economic reform process will be uninterrupted; relatively high productivity growth will be achieved; 0.7 and sound economic management will continue. If the Australian economy fails to match the performance of other world 0.6 economies, a sharply lower Australian dollar than currently assumed could eventuate. On the other hand, if Australia 0.5 significantly outperforms other world economies in terms of economic management and performance, then a stronger USc/A$ Australian exchange rate than currently assumed would, of 1986 1992 1998 course, be consistent with that scenario. -87 -93 -99

australian commodities > vol. 13 no. 1 > march quarter 2006

2004 -05

2010 -11

21

commoditycontents outlook

> Andrew Contact Dickson > +61 2 >6272 +61 ???? 2 6272 > [email protected] 2173 > [email protected]

commodity outlook to 2010-11 an end to the minerals and energy boom in sight Andrew Dickson, John Hogan, Keith Huggan and commodity analysts

> Earnings from Australia’s commodity exports are forecast to rise by 7 per cent in 200607, to $134.2 billion. Exports of minerals and energy resources are forecast to account for around 80 per cent of the total increase. > The turnaround in seasonal conditions since June 2005 provided an ideal finish to the 2005-06 winter crops in many regions and has promoted good pasture growth. Total winter crop production in Australia in 2005-06 is estimated to be 40.1 million tonnes, the second highest on record. > Growth in world demand for most of the major minerals and energy commodities is forecast to ease over the medium term. In most cases this will be reflected in an easing of prices in 2007 and beyond. > Commodity export earnings are projected to ease over the medium term (in real terms), albeit remaining above 2004-05 levels. Major Australian commodity exports

Australian commodity sector Export revenue to rise sharply in 2005-06 Earnings from Australia’s commodity exports are forecast to rise by 25 per cent in 2005-06 to $124.9 billion and by another 7 per cent in 2006-07 to $134.2 billion. Beyond 2006-07, the value of commodity exports is projected to decline gradually in real terms. Export earnings from Australian commodities are projected to be around $123 billion (in 2005-06 dollars) by 2010-11, slightly lower than the forecast value in 2005-06 but around $20 billion higher than the 2004-05 outcome. For farm commodities, export earnings in 2005-06 are forecast to be similar to the level achieved in 2004-05, at $28.0 billion, rising to $29.6 billion in 2006-07. Agricultural commodities for which export earnings are forecast to rise in 2006-07 include wheat, rice, barley, sugar, wine, lamb, live sheep, live cattle and dairy products. However, these increases are expected to be offset by forecast falls in export earnings from cotton, beef and veal and wool. australian commodities > vol. 13 no. 1 > march quarter 2006

2006-07 Value Volume World price

Value Iron ore, pellets Metallurgical coal Crude oil Gold Thermal coal LNG Alumina Copper Aluminium

2005-06 2006-07

Wheat Beef, veal Nickel Wine Dairy Wool Zinc $b 2 4 6 8 10 12 14 16 18 23

commodity outlook Over the medium term, the value of farm exports is projected to remain relatively stable in real terms. Australian farm exports are projected to be worth $29 billion (in 2005-06 dollars) in 2010-11. Total earnings from Australia’s minerals and energy exports are forecast to rise by 36 per cent to $93.1 billion in 2005-06, mainly as a result of significant gains in iron ore prices and export volumes. In 2006-07, export earnings from energy minerals are forecast to be $43.6 billion, supported by an increase in the value of LNG exports of around $1.1 billion and crude oil exports of around $722 million. LNG exports are also forecast to increase significantly, with shipments to Japan from the new Darwin LNG plant already under way and the North West Shelf’s first shipment to Guangdong Province in China expected in mid-2006 underpinning higher output from their fourth LNG train. Beyond 2006-07, earnings from exports of mineral resources are projected to decline (in real terms), mainly as a result of forecast falls in coal and iron ore prices. Nevertheless, projected export earnings in 2010-11 of $90.1 billion (in 2005-06 dollars) still represent an increase of 27 per cent compared with the real value of exports in 2004-05. Over the medium term, export volumes are projected to increase almost across the board for mineral resources, largely (but not entirely) offsetting forecast declines in real prices for most products. The largest increases in the real value of exports over the period 2004-05 to 2010-11 are expected to come from iron ore (up 99 per cent), LNG (up 95 per cent) and metallurgical coal (up 33 per cent). Collectively, export earnings from these three mineral resource commodities are projected to increase by just over $15.1 billion (in real terms) over the outlook period, accounting for nearly 75 per cent of the total increase in the value of Australian exports since 2004-05.

China a key driver of commodity markets Over the past decade, China has emerged as one of the key global economies that is expected to provide impetus to world economic growth in the short term and over the medium to longer term. An estimated 80 million people migrated from rural to urban areas between 2000 and 2005, supporting strong growth in investment in fixed assets. In 2005, fixed asset investment in China is estimated to have increased by approximately 28 per cent, significantly higher than the government target rate of 16 per cent, highlighting the strong underlying growth in infrastructure investment in China. Looking forward, the United Nations Council on Trade and Development (UNCTAD) expects the large rural–urban migration to continue, with a further 70 million people expected to move to China’s urban areas by 2010. The pace of China’s development has highlighted a range of issues surrounding the increasing resource intensity of developing economies (China and India in particular) and invited comparisons with the industrial evolution of the Japanese economy and its impact on the world economy in the 1960s and 1970s. For example, over the period 1955–71, sustained high rates of economic growth and government support led to the rapid expansion of the Japanese steel industry from production of less than 10 million tonnes a year in the mid-1950s to around 120 million tonnes in the early 1970s, ranking Japan as the third largest steel producer worldwide. Growth in Japan’s steel output was dominated by steel produced in large scale, technologically advanced integrated mills producing high end steel products. This, in turn, supported flow-on effects to other industries that used steel intensively, such as automobile production and shipbuilding. Government policies that supported the Japanese steel industry included a rationalisation program that encouraged mergers and output growth by larger mills through concessional loans; preferential tax treatment and foreign exchange loans for raw material purchases; 24

australian commodities > vol. 13 no. 1 > march quarter 2006

commodity outlook Medium term outlook for Australia’s commodities 2003

2004

-04

-05

2005

0.71

0.75

0.74

0.73

0.71

0.68

0.66

0.65

99.6 61.3 53.3 68.5

98.6 77.8 73.7 81.5

100.0 100.0 100.0 100.0

98.3 99.6 94.3 104.4

96.5 94.5 88.8 99.7

94.9 91.5 87.8 94.8

94.4 89.1 85.1 92.7

93.9 86.7 82.0 90.8

69.7

82.4

100.0

99.4

95.1

92.4

90.4

88.5

-06 s

2006 -07 f

2007 -08 f

2008 -09 f

2009 -10 f

2010 -11 f

Commodity exports US$/A$ Exchange rate Unit returns a index Farm index Mineral resources index – energy minerals index – metals and other minerals index Total commodities

Value of exports Farm – real b

A$m A$m

26 206 27 639

27 581 28 396

28 027 28 027

29 620 28 898

30 488 29 019

31 253 29 022

32 070 29 054

32 810 28 999

Crops – real b

A$m A$m

13 406 14 139

13 583 13 984

14 359 14 359

16 014 15 623

17 063 16 241

17 861 16 585

18 628 16 876

19 177 16 949

Livestock – real b

A$m A$m

12 801 13 501

13 998 14 412

13 668 13 668

13 606 13 274

13 426 12 779

13 392 12 436

13 442 12 178

13 634 12 050

Forest and fisheries products – real b

A$m A$m

3 654 3 854

3 630 3 738

3 723 3 723

3 920 3 824

3 810 3 627

3 925 3 644

4 031 3 652

4 130 3 651

Mineral resources – real b

A$m A$m

53 042 55 943

68 649 70 678

93 143 93 143

100 639 98 185

102 308 97 378

103 501 96 111

103 775 94 015

101 948 90 107

Energy minerals – real b

A$m

20 737

29 696

42 696

43 593

44 576

45 775

45 955

44 901

A$m

21 871

30 574

42 696

42 530

42 428

42 507

41 633

39 686

Metals and other minerals – real b

A$m A$m

32 305 34 071

38 953 40 104

50 447 50 447

57 046 55 655

57 732 54 950

57 725 53 604

57 819 52 382

57 047 50 421

Total commodities – real b

A$m A$m

82 902 99 860 124 894 87 436 102 812 124 894

134 179 130 906

136 607 130 024

138 678 128 777

139 876 126 721

138 889 122 757

Farm sector Farmers’ terms of trade Gross value of farm prodn c – real b

index

104.3

99.6

100.0

97.3

94.5

92.8

91.2

88.9

A$m

36 815

35 361

37 154

37 018

37 144

37 578

38 220

38 652

A$m

38 828

36 406

37 154

36 115

35 354

34 895

34 625

34 162

Crops – real b

A$m A$m

20 356 21 470

17 711 18 235

19 518 19 518

20 032 19 544

20 354 19 374

20 805 19 319

21 339 19 332

21 566 19 061

Livestock – real b Net value of farm production – real b

A$m A$m

16 459 17 359

17 650 18 172

17 636 17 636

16 986 16 571

16 789 15 980

16 773 15 576

16 881 15 293

17 086 15 101

A$m

7 523

5 639

6 399

5 991

5 363

5 029

4 819

4 385

A$m

7 935

5 805

6 399

5 845

5 104

4 670

4 366

3 876

Volume of farm production – crops – livestock

index index index

99.6 101.8 97.0

97.6 95.1 100.3

100.0 100.0 100.0

100.3 99.1 101.7

102.2 101.1 103.4

103.9 103.3 104.6

105.8 105.3 106.2

107.8 107.4 108.2

index index index

91.5 94.6 89.0

96.2 96.7 95.7

100.0 100.0 100.0

107.3 103.5 110.9

114.2 109.8 118.5

119.2 111.1 127.2

122.8 112.7 133.1

123.3 112.7 134.1

A$m A$m

50 920 53 705

65 903 67 851

89 417 89 417

96 614 94 257

98 216 93 483

99 361 92 266

99 624 90 254

97 870 86 503

Minerals and energy sector Volume of mine production – energy – metals and other minerals Gross value of mine prodn – real b

a Base: 2005-06 = 100. b In 2005-06 Australian dollars. c For a definition of the gross value of farm production see table 21. s ABARE estimate. f ABARE forecast. Note: ABARE revised the method for calculating farm price and production indexes in October 1999. The indexes for the different groups of commodities are calculated on a chained weight basis using Fishers' ideal index with a reference year of 1997-98 = 100. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

25

commodity outlook closure of the industry to foreign competitors to reduce overcapacity and price cutting risks; and preferential allocation of new capacity rights to steel mills that were perceived to be investing in state of the art technology. In a similar way, China has enjoyed strong growth rates in its steel industry. Since 1990, steel production in China has increased from 66 million tonnes to almost 350 million tonnes and China is now the world’s largest steel producer. China alone accounted for more than the total increase in world steel production in 2005 (output in the rest of the world contracted in 2005) as China’s steel industry was pushed to provide material to burgeoning automobile, electrical appliance manufacturing and construction industries. Similarly, almost across the board, China’s share of world minerals consumption has increased rapidly, reflecting its growing importance on world markets. In 2005, China accounted for around 48 per cent of world consumption of metallurgical coal, 42 per cent of world thermal coal consumption, 40 per cent of world iron ore consumption and well over 20 per cent of world consumption of crude steel, aluminium, copper and zinc. Unlike Japan, limited central government intervention and planning of the steel industry resulted in a significant proportion of China’s steel output being produced in small scale, outdated and often highly inefficient steel mills. More recently, however, China has introduced a number of measures to manage development in the steel industry, such as limiting credit and removing export rebates, as well as having formalised future policy direction in the Development Policy for the Steel Industry that was announced in July 2005. The policy promotes rationalisation of the industry through consolidation to achieve economies of scale as well as the production of higher value products using improved technology. Under this policy, China is aiming to have the ten largest steel mills contribute 50 per cent of output by 2010. This policy approach to industry development is also a template that is being followed in a number of other minerals processing industries in China, such as the aluminium industry. Over the medium to longer term, such policies can be expected to lead to the more efficient use of raw materials and some moderation of the resource intensity of growth in China. However, with China’s rate of economic growth expected to average around 8 per cent a year over the medium term, the total demand for raw materials, and hence the impetus that China provides to world mineral resource markets, is expected to remain strong for many years to come.

Developments with the WTO Doha Round and the 2007 US farm bill The success of Australian agriculture is heavily dependent on export markets, with around twothirds of Australia’s total production being exported (when production and exports are evaluated using consistent farmgate prices). This underpins the importance placed on world events that can disrupt or distort markets and on trade issues — and trade reform in particular. In the immediate future, outcomes from the current World Trade Organisation (WTO) Doha Round of multilateral trade negotiations and changes to US farm policy in the 2007 US farm bill will be critical to the longer term prospects for Australian producers. With respect to specific commodities, US beef exports have again been banned from the Japanese market and reforms to EU sugar policies are in train. Both of these situations are expected to have an impact on Australian producers over the short to medium term.

Outcome of the Hong Kong Ministerial meeting The sixth WTO Ministerial meeting held in Hong Kong, China in December 2005 concluded a challenging year of trade negotiations. The meeting was dominated by discussions on 26

australian commodities > vol. 13 no. 1 > march quarter 2006

commodity outlook export subsidies and developing country issues, with progress made in these areas. However, significant progress on agricultural market access and domestic support remains elusive. Agreement was reached to eliminate all forms of export subsidies, and disciplines on all export measures with equivalent effect, by 2013. This has the potential to be important for sugar and dairy products, reducing world market distortions. An agreement on cotton was also developed, which should result in all forms of export subsidies for cotton being eliminated by developed countries in 2006. In addition, developed countries will also give duty and quota free access for cotton exports from least developed countries from the commencement of the agreed implementation period. Three major negotiating proposals have now been put on the table for agricultural market access improvements and domestic support reductions. The US proposal is the most progressive — that is, it proposes the largest cuts — with the European Union proposing much smaller reductions to tariffs. A G20 proposal represents the middle ground between the US and EU proposals. The G20 is a coalition of developing countries formed at the fifth WTO Ministerial conference held in Cancún, Mexico in 2003 that is seeking to strike a balance between trade liberalisation and development. Tight deadlines have been set to help facilitate the conclusion of the WTO Doha Round by the end of 2006. There was agreement to intensify work on all outstanding issues, with the aim to establish agreed broad outlines for final commitments no later than 30 April 2006. Agreement was also reached to submit comprehensive draft tariff and domestic support schedules, based on these broad outlines, no later than 31 July 2006.

2007 US farm bill The current 2002 US farm bill expires at the end of the 2007 crop year (for farm price and income support programs) and at the end of the 2007 financial year (30 September 2007) for all other programs. The timing of the WTO Doha Round coincides with debate in the United States over a new farm bill. This gives the United States a significant opportunity in the WTO negotiations to change its domestic agricultural support policies in a way that can generate gains domestically, as well as globally. Given the size of the US agricultural sector and the size of US support programs, any changes to the farm bill that result in reform of agricultural support policies has the potential to improve the overall welfare of the US economy. It will be more difficult to achieve a conclusion to the WTO Doha Round if agreement cannot be reached before the Bush Administration’s Trade Promotion Authority (TPA) ‘fast track’ mandate expires. Under this mandate, the US Congress is only able to vote either for or against any trade agreement entered into before 1 June 2007. Congress would not be able to make any amendments to such agreements.

US beef exports to Japan The world beef market has again been affected by a Japanese ban on beef imports from the United States. On 11 December 2005, Japan and the United States reached agreement for the United States to resume exports of beef to Japan from cattle 20 months of age and younger. However, on 20 January 2006, Japan reimposed the import ban on US beef following the discovery of specified risk materials (spinal column) in an airfreight consignment of US veal. Under the regulations announced at the time that trade was resumed, only animals younger than 20 months could be exported to Japan and high risk material (namely the spinal cord and brain tissue) was to be removed. Australian beef producers benefited from the previous Japanese ban on US beef through increased exports at higher prices. In preparing this set of forecasts it has been assumed the trade in beef between the United States and Japan will resume again by mid-2006. However, australian commodities > vol. 13 no. 1 > march quarter 2006

27

commodity outlook it is expected to take a number of years for the United States to regain the market position it held prior to the original ban being put in place in 2003.

Strong south American competition in export markets Australia is also facing increasingly strong competition from South American producers in world agricultural markets. For example, in the past decade, Brazil has almost doubled its share of world sugar production (from 12 per cent to 21 per cent) and increased its contribution to world sugar exports by 180 per cent (from 15 per cent to 42 per cent). Brazil is now the world’s largest sugar producer and exporter. Similarly, beef exports from Brazil to the European Union have increased substantially in only a short period of time and exports of beef from Uruguay to the United States have also increased substantially since 2003. In the case of beef, Brazil and Uruguay have achieved this strong growth despite facing significant tariff barriers in both the EU and US markets. In the European Union above-quota tariffs range from 76 per cent to 142 per cent (in ad valorem equivalent terms) while the above-quota ad valorem tariff in the United States is 26.4 per cent. Substantial quantities of the Brazilian trade with the European Union and almost all of Uruguay’s beef exports to the United States incur the high above-quota tariffs.

EU sugar policy In late 2005, EU agriculture ministers reached in-principle agreement to reform the EU Common Market Organisation for sugar, with the details still to be finalised. Sugar has in the past been left unchanged in previous reforms of the Common Agricultural Policy (CAP). Reform of the domestic sugar industry in the European Union is expected to lead to a substantial decline in EU production and exports in 2006-07. This is a key reason why world production is forecast to grow only modestly in 2006-07, despite high world sugar prices. The current European Commission proposal includes a cut of 36 per cent in the internal EU sugar price over four years, beginning in 2006-07. Farmers would be compensated for, on average, 64.2 per cent of the price cut. The compensation would be provided as part of the European Union’s ‘single farm payment’, linked to environmental and land management standards. However, despite the compensation package, the reforms are likely to place the viability of sugar beet production under pressure in a number of member countries, including Italy, Portugal and Greece. Reform of the EU sugar industry is expected to result in substantially lower EU production and exports over the medium term, with a number of member countries expected to reduce production. Lower EU production and exports are expected to support world prices over the medium term, which, in turn, is likely to benefit low cost producers like Australia.

Infrastructure A key issue that emerged in 2005 was the state of Australia’s port and rail infrastructure and whether a lack of investment in capacity was an impediment to growth in exports. With a large number of resource projects occurring worldwide, a severe shortage of skilled labor has also emerged as a critical issue.

Rail In March 2005 the Prime Minister established a taskforce to identify any bottlenecks of a physical or regulatory kind that may impede the full realisation of Australia’s export opportunities. The final report by the Exports and Infrastructure Taskforce — which can be accessed

28

australian commodities > vol. 13 no. 1 > march quarter 2006

commodity outlook through ABARE’s web site (www.abareconomics.com) — was released in May 2005 and revealed that many major Australian ports are landside constrained. There were four main reasons cited for the congestion: first, many rail operators were faced with conflicts between freight and passenger services; second, the operators that used a dedicated freight line were often faced with capacity constraints; third, in some cases (particularly in Western Australia) where rail capacity constraints were an issue, a lack of road transport infrastructure compounded the problem; and fourth, urban congestion around port sites acted to delay the development of road and rail connections. Currently a number of measures are being taken to alleviate the bottlenecks in Australia’s rail network identified by the taskforce and include both investment in new capacity and improvements to the utilisation of existing capacity. As an example of the latter, the Hunter Valley Coal Chain Logistics Team increased regional flows via rail to port by 20 per cent through 2004 and 2005, with the introduction of a capacity balancing system for the Hunter Valley coal chain. The capacity management system, an additional $270 million upgrade by the Australian Rail Track Corporation and continued investment from rail operators are expected to increase rail capacity in the Hunter to 102 million tonnes by July 2006, which is in line with the expected increase in capacity at the port of Newcastle. Potential bottlenecks in the Queensland rail network have also been identified, notably from North Goonyella and Surat coal operations. Queensland Rail and the Queensland Government are currently developing the Northern Missing Link Project, with feasibility studies under way for the development of additional rail capacity in the short to medium term.

Ports The export infrastructure report highlighted three key sources of current and possible future port constraints. First, insufficient channel depth is inhibiting trade at many Australian ports including Melbourne, Newcastle, Gladstone, Adelaide, Fremantle and Dalrymple Bay. Channel depth in these ports is insufficient for some ships to be loaded to full capacity. Similarly, a lack of channel development at some discharge ports limits the ability of fully loaded ships to use such ports. Second, in some long channel ports, channel width and design is constraining port throughput by a lack of places for ships to pass. This is likely to become a pressing issue in the near future at ports such as Gladstone, where bulk goods are both exported and imported. Third, most bulk ports for coal and iron ore are currently inhibited by a shortage of ship loading facilities. Port upgrades and expansions are currently planned for Geraldton and Newcastle. Further to the recent $103 million dredging upgrade at Geraldton, a dedicated iron ore berth costing $35 million is expected to be completed by mid-2007. Mount Gibson Iron has also offered to contribute $50 million toward a further extension of the Geraldton port to include another dedicated iron ore berth equipped to handle 5 million tonnes a year in 2007. Furthermore, the development of a new $600 million port at Oakajee (22 kilometres north of Geraldton) is being explored as iron ore exports from the region are expected to increase significantly in the medium term. With a large number of coal projects scheduled for completion in Queensland in the short to medium term, there are also three advanced coal terminal expansions, either committed or under construction. These expansions have an estimated capital cost of $1.5 billion and will increase total port capacity in Queensland by an estimated 72 million tonnes a year. The largest of these is Babcock and Brown Infrastructures’ $850 million expansion of the Dalrymple Bay coal terminal, which will increase port capacity from 60 million tonnes a year australian commodities > vol. 13 no. 1 > march quarter 2006

29

commodity outlook to 85 million tonnes a year by late 2008. The Port of Queensland’s $430 million Abbot Point Coal Terminal Expansion (stage 3), near Bowen in Queensland, will increase capacity by around 25 million tonnes a year by 2009. The Central Queensland Ports Authorities’ $232 million expansion of the RG Tanna coal terminal will increase the capacity of the terminal from 45 million tonnes a year to 67 million tonnes a year by late 2006. Rio Tinto has announced plans to upgrade its port facilities at both Cape Lambert and Dampier. The Cape Lambert project will increase iron ore handling capacity by 19 million tonnes and is expected to be completed in late 2006. The 24 million tonne upgrade of the Dampier port is expected to be completed by late 2007. The Newcastle Coal Infrastructure Group also recently won a tender to develop a third coal loader on Kooragang Island in the Newcastle port. This $800 million investment is expected to increase the port’s capacity to 66 million tonnes a year and is expected to be available in mid-2007.

Shortages in materials and skilled labor Reflecting the broad nature of the current worldwide resources boom, the mineral resources sector is experiencing significant shortages across a range of inputs, including materials, equipment and skilled professionals, such as engineers and geologists. Anecdotal reports of mining companies unearthing previously buried haul truck tyres and reusing them is an illustration of the tightness of the materials market. Similarly, the limited availability of engineering contractors and a shortage of skilled labor is affecting the timing and cost of development projects. The Canadian Mining Industry Training and Adjustment Council has estimated that up to 80 000 new people will be needed in the next decade to staff mining operations in Canada alone. Such infrastructure and input constraints are key factors that have impeded the development of new projects worldwide and have prevented a rapid supply response to high minerals prices.

Exploration and investment in the mineral resources sector In line with recent strong rises in the prices of minerals and energy commodities, total Australian minerals exploration expenditure and capital expenditure in 2004-05 was the highest since 1997-98. This is reflected in the record number of minerals and energy projects that are currently either committed to or under construction. These projects are expected to add significantly to the mineral and energy sector’s production and export capacity over the short to medium term. In 2004-05, total Australian minerals exploration expenditure increased by 20 per cent to over $2 billion, with all major sectors except gold, recording increases in expenditure. The major impact of the increase in exploration expenditure is likely to occur toward the end of the projection period because of the often substantial amount of time required for a project to progress from the exploration stage to production. Of comparatively more importance to the short term outlook for Australian production and exports of minerals and energy commodities is the level of investment in new capacity. In real terms (2004-05 dollars), new capital expenditure in 2004-05 was the highest since 199899, with a record 84 projects at advanced stages of development in late 2005. Investment in the mineral resources sector is broad based, although there is a slight weighting toward petroleum and coal projects. Significant capital expenditure is also being undertaken on advanced iron ore, alumina and nickel projects.

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australian commodities > vol. 13 no. 1 > march quarter 2006

commodity outlook

Australia’s rural sector Enterprise mix and total resource use The enterprise mix on Australian broadacre farms has changed rapidly over the past two decades. In the early 1990s, a major shift away from sheep (particularly wool) and into cropping commenced as returns from wool production fell sharply after the collapse of the Australian wool buffer stock scheme. More recently, high beef prices reflecting strong export demand, particularly in Japan and Korea, has encouraged strong growth in the beef industry. These changes in the mix of broadacre farming can be tracked by using a rough rule of thumb that converts beef production and cropping in sheep equivalents — one hectare of beef production is assumed to be equivalent to 8 dry (nonlactating) sheep and one hectare of dairy production or cropping is assumed to be equivalent to 12 dry sheep equivalents. For many years 600 million sheep equivalents was considered to be an upper limit for the broadacre sector, with total resource use averaging around 550 million sheep equivalents from the mid-1970s to the mid-1990s. However, with continued developments in farming practices, equipment and seed varieties allowing producers to use more land, the Agricultural resource use industry pushed through the 600 million mark for the first time in 2004. Over the medium term, growth in both the cropping 700 and beef industries is expected to continue, pushing total resource use in broadacre agriculture through 600 million 600 sheep equivalents again. 500

Wool demand

400

In the sheep industry, a weakening in demand for wool and 300 declining prices has triggered a shift in focus away from wool 200 production to lamb and sheep meat production. In the early 100 1990s wool made up around 90 per cent of the combined million sheep equivalents gross value of production for the sheep and wool sectors; in 2004-05, this had fallen to around 60 per cent. 1975 1982 1989 Of critical importance to Australian wool producers is the medium and longer term outlook for wool demand. It is difficult to avoid the conclusion that changes in consumer tastes and preferences have been (and continue to be) the main drivers behind the significant contraction in the global demand for wool. The price of wool relative to cotton and polyester prices is important, the international textiles and clothing industry is fiercely competitive and there is a high degree of substitutability between the various fibres. However, shrinking production and falling prices point to a sustained contraction in demand for wool rather than simply substitution by processors. In established markets, wool is losing ground to new fabrics, such as synthetics that have been developed to achieve the same functionality as wool (breathable, water repellent and durable) but also include other characteristics, such as being light weight and smooth (particularly close to the skin). However, perhaps of more concern is that new markets, such as China, may not provide the impetus to future growth. Research undertaken by Woolmark Intelligence points to Chinese consumers having a preference for cotton and not being convinced that wool apparel was worth paying extra for. While cotton is under similar pressures from synthetic fibres, cotton is projected to remain cost competitive as productivity improvements are achieved both in the production of cotton (particularly through the rapid adoption of GM crops in India) and in the manufacture of cotton australian commodities > vol. 13 no. 1 > march quarter 2006

Total

Crops Cattle Sheep 1996 2003

2010

31

commodity outlook Australian meat consumption per person

textiles and clothing. The dismantling of the international Multifibre Arrangement is also underpinning strong growth in export demand for textiles and clothing.

100

Meat consumption

Mutton and lamb 80 Pig meat 60 40

Beef

20 Chicken

kg 1981

1987

1993

1999

2005

Australian farm incomes In 2005-06 dollars 14 12 10 8

Net value of farm production

6 4 2 2005-06

$b

1990 -91

Farmers’ terms of trade

Developments in the domestic consumption of beef, lamb, mutton, pig meat and poultry has an important influence on the market prospects for the Australian meat industry. While exports are critically important, particularly to the beef and lamb industries, domestic consumers still account for the major share of total meat sales. Over the medium term, overall consumption of meat per person is expected to rise by around 3 per cent, reflecting lower prices (in real terms) across all the meats. Beef consumption, which is estimated 2011 to have declined to 37 kilograms per person in 2004-05, is projected to increase to almost 38 kilograms per person by 2010-11. In 2004-05, chicken made up 34 per cent of consumers’ meat diets, overtaking beef as the most popular meat in Australia. Over the medium term, this balance is 130 expected to be maintained, with chicken consumption 120 projected to reach 39 kilograms per person by 2010-11. 110 100

Farm costs continue to rise, reducing the net value of farm production

The net value of farm production is forecast to fall by 6 per cent to $6.0 billion in 2006-07. 80 The gross value of farm production for 2006-07 is fore70 cast to be similar to the estimated value of $37.2 billion index achieved in 2005-06. This reflects an expected 3 per cent 1995 2000 2005 2010 increase in the gross value of crop production (reflecting -96 -01 -06 -11 anticipated increases in prices for grains and both production and prices for sugar) and a forecast 4 per cent fall in the value of livestock, wool and dairy production, mainly reflecting anticipated falls in cattle and wool prices. On the other side of the ledger, farm costs are forecast to rise by almost 1 per cent in 200607 to total $31 billion. Higher cost of chemicals and fertiliser, marketing, labor and interest paid are major contributors to this forecast increase. Fuel costs are also expected to remain relatively high in the short term, even though fuel prices are forecast to ease moderately in 2006-07. 90

Minerals and energy Supply side is key to minerals and energy price outlook The main driver for the minerals and energy markets remains strong demand arising from continuing robust world economic growth and China’s appetite for raw materials (discussed earlier). However, against this background, the immediate price outlook for specific commodities is being driven by a range of supply side factors. For many commodities, exploration

32

australian commodities > vol. 13 no. 1 > march quarter 2006

commodity outlook expenditure in the sector has risen in recent years and generated a number of prospective projects, but constraints on skilled labor and material inputs are affecting project development. Notably, prices of iron ore, crude oil, copper, aluminium, alumina and zinc are expected to strengthen in 2006, reflecting limited supply and, for aluminium and crude oil, refining capacity. Prices for other commodities are largely expected to ease but to remain well above trend in the short term. Over the medium term, increased supply is expected to bring minerals and energy commodity prices down toward their long run trend.

2006 price outlook generally more positive ABARE’s 2006 price forecasts for most of the nonbulk minerals and energy commodities have generally increased from those made in the December issue of Australian Commodities. The outlook for global consumption for all commodities has changed little and world industrial production is expected to grow by a similar amount in 2006 as in 2005. However, estimates of world production for a number of the major minerals and metals have been revised down, and is reflected in forecast lower stocks and higher prices. Notably, shortages of skilled labor, equipment and materials are still constraining a rapid supply response across the mineral resources sector due to the large number of brownfield and greenfield projects under development. Costs in the minerals and energy sector also remain under pressure from such factors as higher energy prices, increased wage demands, high capacity utilisation and the attendant plant maintenance requirements. The most significant upward revisions to price forecasts have been for the exchange traded commodities copper, zinc and aluminium, and for crude oil.

Outlook for base metals Prices for base metals are forecast to continue to increase in 2006, with the price of copper, zinc and aluminium forecast to increase by 28 per cent, 35 per cent and 10 per cent respectively. Copper prices increased strongly in 2005 as supply growth was moderate and stocks fell sharply. Prices are being supported by strong demand from China in particular, low stocks, a lack of spare refining capacity and speculative activity. Significant zinc concentrate shortages are expected to persist throughout 2006, supporting prices. Relatively low growth in refined zinc metal production and stocks is expected in 2006 as existing capacity is fully utilised and the possible reopening of idled facilities will have significant lead times. Aluminium prices increased strongly in late 2005 as stocks fell and a number of European smelters announced closures in 2006. Production growth in China is also expected to be moderate in 2006, reflecting ongoing industry rationalisation, the removal of production incentives and more restricted credit provision to the sector.

Crude oil prices The price of crude oil (West Texas Intermediate) is forecast to increase by 6 per cent to US$60 a barrel in 2006 before easing over the medium term. Consumption growth is expected to be strong in line with strong world economic growth but considerable uncertainty remains in the outlook for world oil production. Oil prices are likely to remain volatile, reflecting a lack of spare capacity in both light crude oil production and refining.

Coal prices easing but iron ore prices set to increase further Prices for the range of coal types that Australia exports — hard and semisoft coking coal, coal used for pulverised injection (PCI coal) as well as thermal coal — are all forecast to ease in 2006 as increased supply capacity comes on line. However, contract prices for iron ore for the 2006-07 Japanese financial year are expected to increase by around 12 per cent, with australian commodities > vol. 13 no. 1 > march quarter 2006

33

commodity outlook increased supply capacity from Australia, Brazil and South Africa not expected to be ramped up until late 2006. The forecast retreat in contract prices for coal in 2006-07 reflects the impact of expanded capacity in the supply chain. Similarly, the forecast increase in iron ore prices for 2006-07 is expected to presage falls in the following years as iron ore producers lift capacity. In fact, substantial investment in new coal and iron ore production and transport capacity is already under way. The extent to which production is forecast to increase beyond 2006 is expected to be sufficient to allow capacity utilisation to fall and stocks to rise throughout the supply chain. The increase in availability of coal and iron ore is expected to force prices back down toward their long term trend.

Australian mine output to rise in 2006-07 Following a forecast rise of 4 per cent in 2005-06, the total volume of Australian mine production is forecast to rise by 7 per cent in 2006-07. Production of energy minerals is forecast to increase by 3.5 per cent and metals and other minerals by 11 per cent in 2006-07. The forecast increase in Australian production of minerals and metals is expected to come mainly from substantially higher output of iron ore, alumina and nickel. The forecast rise in iron ore output of around 10 per cent mainly reflects new production capacity at Rio Tinto and BHP Billiton operations in Western Australia that are due to come on stream from late 2006 and that are targeted to meet continued strong demand from China. Australia’s alumina output is forecast to rise by around 12 per cent in 2006-07, as production ramps up from Comalco’s new greenfield alumina refinery at Gladstone that started in early 2005 and expansions to existing capacity at Alcoa and Worsley refineries in Western Australia. The forecast rise in nickel concentrate output is mainly a result of expansions at LionOre Mining’s Black Swan project and Western Areas Forrestania project. The forecast increase in the output of energy minerals in 2006-07 will be supported by rises in production of crude oil, natural gas and coal. Crude oil production is forecast to increase through development of Woodside’s Enfield project in Western Australia. Natural gas production will be boosted by higher output by the North West Shelf’s fourth LNG train and the startup in 2006 of the new Darwin LNG plant. Australian coal output is forecast to increase through a number of expansions and some new projects in Queensland and New South Wales, with a number of the Queensland projects being able to take advantage of higher expected port capacity. Looking further out, total Australian mine production is projected to rise by 15 per cent in the four years to 2010-11, with strong increases in natural gas, alumina, coal, iron ore and nickel output outweighing an anticipated decline in petroleum and uranium production.

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australian commodities > vol. 13 no. 1 > march quarter 2006

contents grains

> Leanne Contact Lawrance > +61 2 6272 > +61???? 2 6272 > [email protected] 2028 > [email protected]

grains outlook to 2010-11 prices increasing in 2006-07 Leanne Lawrance, Amelia Duck and Sally Fletcher

> A reduction in world supplies of grains and oilseeds, along with growing demand, is forecast to result in an increase in prices in 2006-07. > Increased demand for feed grains from intensive livestock industries is underpinning growth in coarse grains consumption in 2006-07. > The medium term outlook for grains will be significantly influenced by: the increased importance of grains for industrial purposes, particularly in the ethanol and biodiesel industries; continued growth in China’s grains and oilseeds consumption and the expansion of grains production in the Russian Federation and oilseeds production in Brazil.

Short term outlook World prices to rise moderately in 2006-07

World grain prices

As a result of continued strong demand for wheat in 2006-07 and a forecast reduction in world wheat supplies, the world 350 wheat indicator price (US hard red winter, fob, Gulf ports) is forecast to increase by 2 per cent to average US$166 a 300 tonne in 2006-07. However, prices could go higher if the 250 current dry conditions being experienced in the United States 200 continue. The world indicator price for coarse grains (US corn, fob 150 Gulf) is also forecast to increase by around 2 per cent, to average US$105 a tonne in 2006-07. This reflects increased 100 2005-06 world demand and largely unchanged coarse grains supplies US$/t in 2006-07. In contrast, world barley prices are forecast to 1990 1995 2000 fall in 2006-07 as production in key exporting nations, such -91 -96 -01 as the European Union and the Ukraine, increase. The world oilseeds indicator price (soybeans, cif, Rotterdam) is forecast to increase by 3 per cent in 2006-07 to US$272 a tonne, as global demand for oilseeds products remains strong and global supplies remain largely unchanged.

Soybeans

Wheat

Corn 2005 -06

2010 -11

World grain production affected by seasonal conditions Seasonal conditions in the major grains and oilseeds producing areas are a major factor affecting production. Over the past two seasons in both north America and the European Union, seasonal conditions have been favorable and yields have been well above average. australian commodities > vol. 13 no. 1 > march quarter 2006

35

crops In the coming season it is assumed that seasonal conditions will be consistent with longer term averages and, accordingly, yields are expected to decline in some of the major producing countries. In some cases, ‘average’ yields are increasingly reflecting the adoption of new seed varieties (such as with corn in China) or the adoption of genetically modified seed varieties (as is the case with US corn and soybeans). This is particularly important in the context of the medium to longer term outlook for grains production.

World wheat supplies to fall World wheat production is forecast to fall by 17 million tonnes to 599 million tonnes in 200607, as the area sown to wheat declines and yields in some of the major producing countries return to average. While world wheat production has been at record highs in the previous two seasons, relatively low stocks have meant that the total available wheat supply has still been lower than the records of 1999-00 and 2000-01. With stocks remaining historically low in 2006-07 (largely from a continued rundown in China’s wheat stocks) and production forecast to ease, world wheat supplies are forecast to fall by 3 per cent in 2006-07, when compared with the previous season. Much of the decline in production is forecast to come from China, the Russian Federation and the Ukraine. Production in the latter two countries is forecast to fall by 18 per cent and 25 per cent in 2006-07 respectively. Little snow cover (snow insulates crops from cold temperatures) and cold temperatures in mid-January 2006 is likely to have resulted in crops being damaged by frosts and winter kill. The area sown to wheat in China has been falling steadily since the mid-1990s as competition with other land uses has intensified. In 2004 the Chinese Government implemented polices to encourage grains production. In the 2005-06 season the area sown to wheat in China increased, reversing a seven year decline. In 2006-07 the area sown to wheat is forecast to again increase by around 1 per cent to 23 million hectares. However, this is still well below the average for the past ten years (26.6 million hectares). In the previous two years, wheat yields in China were well above average (9 per cent above the five year average) as seasonal conditions were favorable. Despite the increased area sown, production of wheat in China is forecast to fall by 4 per cent in 2006-07 as yields are assumed to fall, reflecting a return to average seasonal conditions. With favorable returns for wheat in the United States in 2005-06 and a positive outlook, the area planted to wheat is forecast to increase by around 1 per cent in 2006-07. However, conditions in the southern and central plains regions of the United States have not been favorable for the winter wheat crop (there are both winter and spring crops in the United States). Continued dryness means that crops in these areas are currently suffering from moisture stress. As a result total US wheat production is forecast to decline by 2 per cent to around 56 million tonnes in 2006-07.

Marginal increase forecast for world coarse grains production in 2006-07 World coarse grains production in 2006-07 is forecast to be 967 million tonnes, marginally up on production in 2005-06. Corn production is forecast to increase in the United States and China, reflecting continued yield improvements. In the United States, yield improvements over the past decade have been in part attributed to the rapid adoption of genetically modified corn. It is estimated that the area sown to GM corn varieties in the United States increased from 26 per cent in 2001 to 45 per cent in 2004. In the case of China, improvements in corn yields have been linked to the adoption of improved (non-GM) seed varieties. Production in

36

australian commodities > vol. 13 no. 1 > march quarter 2006

crops Brazil is forecast to increase in 2006-07, as a result of increased area planted, with yields remaining similar to those achieved in 2005-06. Barley production is expected to increase throughout the European Union in 2006-07, largely reflecting CAP reforms and EU enlargement. The abolition of EU price support payments for rye will encourage more area to be allocated to barley production in the enlarged European Union. In the Russian Federation the 2006-07 crop has already been sown. The area harvested is expected to remain at around 9 million hectares. Assuming average yields, total production is forecast to reach 16 million tonnes in 2006-07.

Oilseeds production lower World oilseeds production is forecast to fall by 3 per cent to 377 million tonnes in 2006-07 as yields are expected to ease (reflecting a return to average seasonal conditions). The global oilseeds market is dominated by soybeans, which account for over half of world production of oilseeds. The United States is the largest oilseeds producer and in the past two years has achieved record yields and production. In 2006-07 it is forecast that the area sown to soybeans in the United States will increase by around 1 per cent. With yields assumed to return closer to historical averages, production is expected to decline. There is still considerable uncertainly surrounding the size of the 2005-06 soybean crop in Brazil and Argentina, the other major soybean producers. Dry conditions in October– December 2005 have caused some damage to soybean crops in these countries. Nevertheless, soybean production in Brazil and Argentina is forecast to increase in 2005-06.

Wheat outlook Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

million ha t/ha Mt Mt Mt Mt % %

207 2.68 555 593 127 102 21.4 17.1

215 2.90 625 613 140 109 22.9 17.8

213 2.90 616 618 138 108 22.3 17.5

210 2.85 599 619 117 111 18.9 18.0

215 2.89 620 620 117 112 18.8 18.0

214 2.92 623 621 119 112 19.1 18.0

212 2.95 627 625 121 112 19.4 18.0

211 2.99 632 628 124 113 19.8 18.0

US$/t US$/t

160 171

154 159

163 163

166 162

159 151

153 142

147 134

141 126

’000 ha Area t/ha Yield kt Production kt Export volume Export value A$m – nominal A$m – real d APW 10 net pool return c A$/t – nominal A$/t – real d

13 067 2.00 26 132 15 073

13 766 1.64 22 605 15 779

12 625 1.99 25 090 15 759

12 807 1.92 24 548 17 863

13 000 1.94 25 218 20 255

13 202 1.98 26 174 22 087

13 412 2.01 26 913 22 622

13 511 2.05 27 678 22 699

3 475 3 665

3 488 3 591

3 483 3 483

4 083 3 983

4 539 4 321

4 802 4 459

4 771 4 323

4 644 4 105

233 246

197 203

192 192

198 193

195 186

190 177

188 170

185 163

World Area Yield Production Consumption Closing stocks Trade Stocks to use ratio Trade to use ratio Price a – nominal – real b

Australia

a US hard red winter wheat fob Gulf, July–June. b In 2005-06 US dollars. c Australian premium white wheat, 10 per cent protein. d In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Grains Council; US Department of Agriculture; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

37

crops Over the past ten years the harvested area of soybeans in Brazil has increased on average by 7 per cent a year. With a forecast strengthening in world oilseeds prices, the area sown to soybeans in Brazil is forecast to increase again 30 80 in 2006-07, although at a slower rate than over the past 25 ten years. This moderation in the growth in area sown to 60 soybeans reflects increased competition from competing 20 crops, particularly sugar. 15 40 With a return to average seasonal conditions in 2006-07, canola (or rapeseed) production, which accounts for around 10 20 12 per cent of world oilseeds production, is forecast to be 5 lower in both the major producing countries of Canada and m ha Mt the European Union. Canola yields in Canada increased to a record 1.8 tonnes per hectare in 2005-06, well above 1995 1997 1999 2001 2003 2005 -96 -98 -2000 -02 -04 -06 the ten year average yield of 1.4 tonnes per hectare on the strength of excellent seasonal conditions. Cottonseed accounts for around 11 per cent of world oilseeds production. Cottonseed availability has been at record highs for the previous two seasons as production in the largest cotton producing nations — China, India, Pakistan and the United States — has been at record levels. In 2006-07 a forecast increase in the area sown to cotton is expected to lead to a further 4 per cent increase in cottonseed production. Palm oil is the second largest vegetable oil produced worldwide, behind oil produced from soybeans. In the largest two producing countries — Malaysia and Indonesia — both the area sown to palms and yields have been increasing. Production of palm oil increased by 3 per cent in 2005-06 and is forecast to increase again in 2006-07. Although palm oil is considered to be less healthy than other vegetable oils, such as those produced from soybeans and canola, it is also relatively inexpensive. The largest consumers of palm oil are developing economies such as Indonesia and India.

Soybeans

Area Production United States Brazil Argentina

World grain demand Wheat consumption largely unchanged World wheat consumption in 2006-07 is forecast to be around 619 million tonnes, largely unchanged from the previous season. The total volume of wheat used for human consumption has changed little in recent years, rising by less than 1 per cent a year. The worldwide average consumption of wheat (on a per person basis) has been declining relatively steadily since the late 1980s, reflecting the increased diversification of staples in consumers’ diets. However, population growth as well as growth in wheat consumption in populous countries where it is not traditionally a staple, such as Indonesia, has led to an overall increase in wheat used for human consumption. Nevertheless, much of the change in wheat consumption is being driven by demand for feed wheat in livestock rations which, in turn, reflects strong growth in the demand for meats such as pork and chicken. By far the world’s largest market for feed wheat is the European Union, accounting for around half of the world’s consumption. Total feed wheat consumption in the European Union is estimated at 57 million tonnes in 2005-06, with the pig industry being the largest consumer.

38

australian commodities > vol. 13 no. 1 > march quarter 2006

crops Increased coarse grains consumption World consumption of coarse grains is forecast to increase slightly in 2006-07, to around 976 million tonnes. World trade in coarse grains is forecast to increase to around 102 million tonnes. Exports of corn from the United States are expected to increase in 2006-07, while exports from China and Argentina are forecast to decrease. Growth in coarse grains trade is strongly linked to increases in the production of intensive livestock, particularly in developing countries where incomes and per person consumption of

Coarse grains outlook Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

million ha t/ha Mt Mt Mt Mt %

307 2.98 914 942 135 103 14.32

302 3.34 1 008 972 172 101 17.64

300 3.19 958 971 165 100 16.99

303 3.19 967 976 157 102 16.06

306 3.22 987 980 163 104 16.63

309 3.24 1 002 990 174 105 17.61

312 3.25 1 017 1 015 176 107 17.35

316 3.27 1 032 1 040 168 107 16.12

US$/t US$/t

116 123

97 100

103 103

105 102

107 102

110 103

114 104

117 105

ha ha ha ha ha ha

4 477 1 089 445 734 70 6 815

4 617 892 338 803 75 6 725

4 739 859 347 889 76 6 910

4 645 816 340 773 70 6 644

4 691 824 347 797 73 6 732

4 738 832 354 821 77 6 821

4 762 841 361 853 79 6 896

4 785 849 368 887 82 6 972

kt kt kt kt kt kt kt

10 382 2 018 826 2 009 395 15 630 6 881

7 708 1 321 615 2 184 312 12 140 6 720

9 869 1 408 675 2 308 391 14 651 6 732

9 289 1 306 595 1 988 376 13 553 6 816

9 476 1 339 613 2 088 396 13 912 7 147

9 666 1 372 632 2 175 418 14 263 7 411

9 812 1 407 651 2 284 435 14 588 7 639

9 959 1 442 670 2 399 453 14 924 7 818

kt

5 782

7 187

5 098

6 611

6 541

6 872

7 171

7 463

World Area Yield Production Consumption Closing stocks Trade Stocks-to-use ratio Price a – nominal – real b

Australia Area Barley Oats Triticale Sorghum Maize Total Production Barley Oats Triticale Sorghum Maize Total Domestic use c Export volume Export value – nominal – real e Price – nominal Feed barley d Malting barley d Grain sorghum Price – real e Feed barley Malting barley Grain sorghum

’000 ’000 ’000 ’000 ’000 ’000

A$m

1 373

1 412

1 111

1 401

1 419

1 527

1 639

1 763

A$m

1 448

1 454

1 111

1 367

1 351

1 418

1 485

1 559

A$/t

182

169

153

156

160

164

169

174

A$/t

214

198

178

182

186

191

197

203

A$/t

159

150

168

174

176

179

182

183

A$/t A$/t A$/t

192 226 167

174 204 155

153 178 168

153 177 170

152 177 168

153 177 166

153 178 165

154 179 162

a US corn, fob Gulf, October–September. b In 2005-06 US dollars. c Includes changes to stocks. d Gross unit pool returns to Australian growers. e In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: US Department of Agriculture; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

39

crops meat are rising rapidly. Key growth markets include Mexico, north Africa, the Middle East and east and south east Asia. The United States currently supplies more than half of all the world’s exports of coarse grains and hence the harvest in the American midwest is crucial to world supplies. With south America becoming increasingly competitive in soybeans, US growers are expected to shift their focus from soybeans to corn, thus increasing production in this region. Severe drought conditions in Texas are expected to increase the demand for feed grains, as the number of cattle on feed increases. Total US feed use is expected to increase in 200607, matching the previous record reached in 2004-05. Another major factor expected to influence the use of corn in the United States in 2006-07 is the demand for ethanol as a fuel extender or substitute for traditional oil based fuels. Ethanol remains the biggest growth sector in global grain use. Use of corn for ethanol production in the United States is forecast to reach 40 million tonnes in 2006, compared with around 12 million tonnes in 1995. In the European Union, the higher availability and lower prices for feed wheat are expected to continue to displace some coarse grains in livestock feeds in 2006-07, thereby reducing coarse grains feed demand. Continuing increases in China’s demand for meat, fish and dairy products, driven by increasing incomes, will lead to a further expansion of the livestock and aquaculture sectors, increasing demand for feed grains. Coarse grains consumption in China is again forecast to exceed domestic production, leading to a further reduction in stocks and reduced corn exports.

China dominates growth in oilseeds consumption World use of oilseeds is driven largely by the demand for vegetable oil and oilseed meal by the processed food sector and livestock industries. The demand for both oilseeds and oilseed meals has increased significantly over the past decade, with worldwide consumption of each rising by around 40 per cent. In 2006-07, oilseeds consumption is forecast to increase by 2 million tonnes to 381 million tonnes. China is one of the world’s largest consumers of oilseeds and oilseed products (vegetable oil and oilseed meal). Increasing incomes and changing dietary habits in China have led to a strong rise in the demand for vegetable oils and oilseed meals. Despite an assumed slowdown in China’s economic growth from 10.1 per cent in 2004 to 9.9 per cent and 8.7 per cent in 2005 and 2006 respectively, the demand for vegetable oils and oilseed meal in China is still forecast to continue to grow strongly. Consumption of vegetable oil in China (on a per person basis) has doubled since the mid1990s — rising from around 8 kilograms to an estimated 16 kilograms per person in 200506. This compares with the United States, where vegetable oil consumption has increased by 23 per cent from 30 kilograms to 37 kilograms per person over the same period. Increased demand for meat and poultry products has also resulted in China’s oilseed meal consumption, for use by domestic livestock industries, increasing by an average of 9 per cent a year over the previous ten years. In 2006-07 it is forecast that the demand for oilseed meal from China’s livestock industries will continue to increase, as the demand for meat and meat based products also continues to rise. The rapid increase in the demand for oilseed products in China has outstripped rising domestic production and so China is now a significant importer of oilseeds. China’s oilseeds imports have risen from under 1 million tonnes in the mid-1990s to around 28 million tonnes in 2005-06, with the major suppliers being the United States, Brazil and Argentina.

40

australian commodities > vol. 13 no. 1 > march quarter 2006

crops China’s differing tariff rates between oilseeds and oilseed products has also contributed to the rapid increase in the volume of oilseeds imported, particularly soybeans. Soybeans attract a tariff of 3 per cent, for vegetable oils and canola seed the tariff is 9 per cent, and for other unprocessed oilseeds it is 15 per cent. Importing unprocessed soybeans allows the beans to be processed domestically, and both the oil and meal to be consumed on the domestic market. Investment in crushing capacity has grown rapidly, with the total annual crushing

Oilseeds outlook 2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

Mt Mt Mt US$/t US$/t

334 337 23

379 369 34

389 379 43

377 381 40

387 392 35

398 402 31

410 412 30

425 424 30

321 341

275 283

263 263

272 265

265 253

259 241

252 231

246 221

Mt Mt

190

205

213

211

217

223

230

238

190

205

212

214

222

229

235

241

Mt

5

5

6

6

5

4

9

10

US$/t US$/t

256 272

212 219

216 216

223 217

218 207

212 198

207 189

202 181

Mt Mt

102

110

114

109

112

116

119

123

100

108

114

115

116

118

120

122

Mt

7

8

8

8

8

8

8

8

US$/t US$/t

633 673

545 563

526 526

547 532

533 508

520 485

507 464

494 443

kt kt kt

2 400 1 731 669

2 607 1 534 1 073

2 468 1 444 896

2 525 1 428 1 098

2 706 1 511 1 196

2 909 1 599 1 310

3 096 1 693 1 403

3 265 1 757 1 508

’000 ha kt kt

1 211 1 703

1 351 1 496

962 1 405

1 058 1 391

1 111 1 475

1 167 1 565

1 225 1 659

1 262 1 726

1 202

892

863

974

1 033

1 095

1 161

1 208

$m

528

326

307

356

366

377

388

391

$m

557

335

307

348

349

350

351

346

A$/t A$/t

389 410

338 348

335 335

348 340

338 321

328 304

318 288

308 272

’000 ha kt kt

46 58

46 62

88 112

91 113

94 118

96 122

99 127

102 132

1

3

4

7

7

7

7

7

A$/t A$/t

372 392

364 375

349 349

356 347

345 328

335 311

325 294

315 278

Unit

World Oilseeds Production Consumption Closing stocks Indicator price a – real b Protein meals Production Consumption Closing stocks Indicator price c – real b Vegetables oils Production Consumption Closing stocks Indicator price d – real b

Australia Total production Winter Summer Canola Area Production Export volume e Export value e – nominal – real h Price g – real h Sunflowers Area Production Exports i Price j – real h

a Soybean, cif Rotterdam, October–September basis. b In 2005-06 US dollars. c Soybean meal, cif Rotterdam, 45 per cent protein. d Soybean oil, Dutch, fob ex–mill. e Marketing year: November–October. g Delivered Melbourne, November–October. h In 2005-06 Australian dollars. i Marketing year, April–March. j Delivered Sydney, April–March. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; US Department of Agriculture; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

41

crops capacity in China increasing to 70 million tonnes in 2005. With around 29 million tonnes actually crushed in 2004, it is evident that significant excess capacity now exists in China.

World grain stocks Further falls in world wide wheat stocks Worldwide end of season stocks of wheat have declined from around 205 million tonnes in 1999-2000 to an estimated 138 million tonnes in 2005-06. Much of this observed decline in wheat stocks has resulted from a rundown in stocks held by China. In the mid-1990s, China held approximately half of the world’s wheat stocks. In 2005-06, China is estimated to hold less than 20 per cent of world stocks. The share of world stocks held by the major five exporters (Argentina, Australia, Canada, the European Union and the United States) has increased from 21 per cent in the mid-1990s to 36 per cent in 2005-06. With China’s domestic consumption currently exceeding production by around 15 million tonnes, it is expected that China’s wheat stocks, and hence world wheat stocks, will be further reduced in 2006-07.

Coarse grains stocks also reduced

World wheat stocks Major exporters China Other

80 60 40 20 Mt 1997 -98

1999 -2000

2001 -02

2003 -04

2005 -06

World stocks of coarse grains are forecast to decline by around 5 per cent in 2006-07, adding further support to expectations of higher prices. A large proportion of this decline is expected to come from a fall in corn stocks in China and the United States. Feed grain demand in China is forecast to continue to increase, reflecting strong growth in the intensive livestock sector. China’s domestic production of corn is expected to increase marginally in 2006-07, reflecting continued yield improvements. However, China’s 2006-07 corn crop is not expected to meet domestic requirements and hence China’s stocks are expected to be reduced. In the United States, feed grain demand is expected to remain at record levels in 2006-07. This, combined with increased demand for ethanol, is expected to result in a depletion of US corn stocks.

Australia Near record harvest in 2005-06 Winter grains and oilseeds production in Australia is estimated to have increased by 15 per cent in 2005-06 to around 40.6 million tonnes, the second largest winter harvest on record. The 2005-06 winter grains harvest exceeded all expectations for the year. The beginning of the cropping season in the eastern states and South Australia was extremely dry and some crops were dry sown. However in mid to late June, season breaking rainfall was received. The late break to the season in these regions provided an opportunity for additional late plantings to occur, particularly for barley. Barley is less vulnerable to severe changes in seasonal conditions and the optimal planting time for barley extends later in the season than for either canola or wheat. As a result, the area sown to barley is estimated to have increased by 3 per cent in 2005-06. While additional late planting occurred for barley as well as for wheat, there was 42

australian commodities > vol. 13 no. 1 > march quarter 2006

crops expected to be some yield penalties associated with late sowing. However, conditions at the end of the season were favorable and yields were generally above average. In Western Australia the early break to the season and favorable growing conditions resulted in an estimated 14 million tonnes harvested in that state, the second largest harvest on record. In contrast to the outcomes for wheat and barley, the canola crop is estimated to have fallen by around 6 per cent in 2005-06 to 1.4 million tonnes. The dry conditions at the start of the 2005-06 winter cropping season resulted in a significant reduction in the area sown to canola, with the season breaking rains simply coming too late in most areas. However, with the improvement in seasonal conditions throughout the 2005-06 growing season, the yields for areas where a crop was established were generally above average. Prospects for Australia’s summer crop production in 2005-06 remain positive, with production forecast to increase by 21 per cent to around 5 million tonnes. This increased production is a reflection of higher plantings and increased yields.

Crop area relatively unchanged in 2006-07 Despite forecast strengthening in Australian grains and oilseeds prices, the total area sown to grains is expected to remain largely unchanged in 2006-07 at around 22 million hectares. While the total area sown to grains is likely to remain roughly the same, the cropping mix is expected to change. With the late break to the season in 2005-06, an increased area was sown to barley in place of crops such as canola. In 2006-07, the area sown to canola is likely to recover, with the areas sown to pulses and wheat also forecast to increase. For barley the area sown is forecast to fall by 2 per cent in 2006-07. Overall, the production of wheat, barley, canola and pulses are all forecast to decline as yields are expected to return to a level more consistent with recent averages.

Australia’s wheat exports and prices increase in 2006-07 Australia is the world’s second largest wheat exporter and, with world trade forecast to increase in 2006-07, Australian exports are also forecast to increase. Australia’s wheat exports are forecast to increase by 13 per cent in 2006-07 to total nearly 18 million tonnes, the largest volume in the past ten years. Indonesia is Australia’s largest market for wheat exports. In the past five years exports to Indonesia have accounted for 15 per cent of total Australian wheat exports. Australia supplies over half of Indonesia’s total wheat imports, with the other major supplier being Canada. In Indonesia, rice is the main staple in consumer diets, and bread and other wheat derived foods are considered supplementary or luxury goods. During the past two decades, the consumption of cereals has increased, partially displacing the consumption of root crops, such as cassava and sweet potato, in the national diet. The tropical climate in Indonesia is not suited for wheat production and therefore any increase in consumption of wheat based products results in increased import demand. Indonesia’s wheat imports have increased from 2 million tonnes in the early 1990s to just below 5 million tonnes in 2005-06. Import demand from Indonesia is expected to continue to grow steadily over the medium term. World wheat prices are forecast to increase in 2006-07 and, with an assumed weakening of the Australian dollar, returns to Australian growers will increase further. The pool price for Australian premium white wheat is forecast to rise by 3 per cent to just under $200 a tonne in 2006-07.

australian commodities > vol. 13 no. 1 > march quarter 2006

43

crops Barley exports also increase Australia’s barley exports in 2006-07 are forecast to increase by 3700 tonnes to 5.9 million tonnes. Barley exports include feed and malting barley as well as an estimate of the grain equivalent of malt exports. Over the past five years, Australia’s largest market for malting barley exports has been China, accounting for 65 per cent of shipments. Malting barley is a principal component in beer production and China is currently the world’s largest producer and consumer of beer. Annual beer consumption in China increased from 10 litres per person in 1993 to 17 litres per person in 2003. Nevertheless the consumption of beer in China is still well below that of some developed economies. For example, beer consumption (on a per person basis) averaged 31 litres in Japan, 82 litres in the United States and 92 litres in Australia in 2003. This illustrates the significant potential for future growth in China as incomes continue to rise. Although China has implemented policies to encourage barley production, these polices are likely to have little impact on import requirements in the short term.

Barley and canola prices increase In response to a tightening world coarse grains and oilseeds supply–demand balance in 2006-07, Australian prices for these grains are forecast to increase. The Australia feed barley price is forecast to increase by 2 per cent in 2006-07 to $156 a tonne, while the Australian canola price is forecast to increase by 4 per cent to average $348 a tonne.

Medium term outlook Price trends World grains and oilseeds prices declined in real terms between 1994-95 and 2000-01, reflecting increasing production relative to demand. Between 2000-01 and 2002-03, prices rose (in real terms), particularly in the case of soybeans, as a result of consumption increases in major consuming and importing countries. Since that time prices have again eased as production worldwide has increased. Over the medium term, the world supply and demand situation is expected to remain relatively tight across most of the grains. However, with continued productivity improvements, increases in grains production is expected to more than keep pace with demand growth and hence the longer term declining trend in real prices is expected to continue. However, abrupt changes in production (such as from poor seasonal conditions), particularly among the world’s large producers and exporters, are likely to be translated quickly into significant price fluctuations.

World demand Global wheat consumption is projected to increase by around 2 per cent between 200506 and 2010-11. Average global wheat consumption (on a per person basis) peaked at around 108 kilograms in the late 1980s. By 2005-06 this is estimated to have declined to 95 kilograms. Over the medium term this trend is projected to continue, with wheat consumption projected to average around 92 kilograms per person in 2010-11. As discussed earlier, falling wheat consumption per person is not a trend that is consistent across all countries. While it is evident that wheat consumption is falling in most of the major

44

australian commodities > vol. 13 no. 1 > march quarter 2006

crops developed country markets, such as the United States and the European Union, per person consumption of wheat in Indonesia and Brazil has been increasing.

Ethanol the key driver of corn demand The use of corn in ethanol production will increasingly become an important driver of world corn prices. According to the USDA Corn Market Outlook, ethanol production in the United States is forecast to double by 2011. The growing demand for ethanol as both a fuel extender and fuel octane enhancer is underpinning strong demand for corn in the United States. The International Grains Council, in its January Grain Market Report, indicates that in the 2005-06 marketing year, 40 million tonnes of corn will be processed into ethanol in the United States. This will produce over 16 billion litres of ethanol compared with just over 5 billion litres in 1995. The US Energy Act of 2005 contains a renewable fuels standard requiring increased production of fuel from renewable sources. Eight ethanol plants were built in the United States in 2005, bringing the total number to 90. In 2006, thirty more new plants or expansions are currently planned or proposed. Ethanol production in the United Sates has also increased rapidly since methyl tertiary butyl ether (MTBE), an octane enhancer produced from methyl alcohol, was banned in many states in the United States. In 2004, California and New York, the nation’s largest gasoline markets (and accountable for almost 39 per cent of total US MTBE consumption), prohibited the use of MTBE. A federal tax credit for ethanol blending, currently 51 cents per US gallon (US13.5 cents a litre), that also encourages the use of ethanol in the United States, is expected to be continued over the medium term. Coproducts from the production of ethanol such as feed, meal, oil and distillers grains are also of high value and underpin the profitability of ethanol production. In the process of converting corn to ethanol, starch is removed from the grain. As a result the levels of minerals, vitamins, fat and fibre left in the residual product are higher than for unprocessed corn. These byproducts are of value to livestock industries as a feed ration. All these factors combined are expected to result in ethanol production in the United States reaching 28 billion litres by 2012, using around 65 million tonnes of corn. Worldwide, ethanol production using corn is expected to increasingly become a key driver of the outlook for the corn industry.

Biodiesel important for oilseeds demand Biodiesel production in the European Union is also becoming an increasingly important end use of oilseeds, such as canola. In the European Union, biodiesel production increased to 3.8 million tonnes in 2005, up from 1.9 million tonnes in 2002. Production capacity is expected to continue to increase to 4.5 million tonnes in 2006 and 5.3 million tonnes in 2007. The greatest expansion in biodiesel production in the European Union has occurred in Germany, with significant increases in investment from 2004 onward, reflecting tax arrangements that favor the production and consumption of biofuels. With the industry expected to continue to expand over the medium term, the demand for canola oil is expected to increase, providing further support for the demand for oilseeds more broadly.

Prospects in key markets There are a number of countries and regions where developments over the medium term will influence world grains and oilseeds markets. These countries include China, the Russian Federation, Brazil and the European Union. In the case of the European Union (one of the australian commodities > vol. 13 no. 1 > march quarter 2006

45

crops world’s largest producers, consumers and exporters of grains and oilseeds) changes in government policies that affect domestic grains production may have implications for world grains trade (see box on the European Union).

China The growth in production of agricultural products in China is constrained by a number of factors, such as limits to the availability and quality of water and urban encroachment into areas of highly productive agricultural land, particularly in the coastal regions. For example, high yielding wheat varieties grown in China over the drier winter months are reliant on irrigation and, hence, wheat producers are increasingly competing with manufacturing industries and residential consumers for available water supplies. Similarly land is being increasingly diverted into intensive horticultural production (vegetable and fruit production, oil crops and aquaculture) as well as for urban development. As such, increased grains production in China over the medium term will rely heavily on productivity improvements rather than an increase in the area cultivated. China is currently the world’s third largest corn exporter. However, corn exports from China have been declining. Expansion in China’s livestock industries — to meet increased demand for meat and meat products — has resulted in a significant increase in the domestic consumption of corn. Historically, domestic corn production and stocks have been able to supply the increased demand. Over the medium term, China it expected to become a net importer of corn.

European Union CAP reforms The Common Agricultural Policy (CAP) covers most grain produced by and imported into the European Union. As with other commodities, grain support mechanisms include a mixture of price supports and supply controls. CAP reforms have affected grain production mainly by requiring grain farmers to remove a percentage of their arable cropland from production in order to receive direct payments in compensation for reduced price supports. According to the US Department of Agriculture, the latest reforms represent a degree of flexibility, with each member state having discretion over the timing (from 2005 to 2007) and method of implementation. The 2003 reforms allow for decoupled payments — payments that are not directly linked to production — that vary by commodity. Called single farm payments, these decoupled payments will be based on 2000–02 historical payments and replace the existing compensation payments. The implementation of the 2003 CAP reform began in 2004 and the single payment scheme will replace most of the previous area payments between 2005 and 2007, depending on each country’s implementation date. The gradual introduction of single payment schemes will further reduce production and trade distortions, although the decision about which commodity linked payments to include in the schemes differed widely between EU countries.

46

These policy reforms are expected to affect the mix of grain production in the European Union as producers adjust to lower price support. Rye intervention price support was eliminated as a result of the 2003 reforms. Without reform of rye support, accession to the European Union of ten new member states (EU expansion) would have brought large increases in rye output, particularly in Poland, where rye is an important crop. The change in the method of price support will still encourage production, but will reduce the policy based incentive to produce specific crops. The effects of CAP reform on global markets will ultimately depend on the impacts that the reforms have on EU domestic production and consumption. Overall effects on EU production and consumption from CAP reform are likely to be minimal because support price cuts are limited to minor commodities. Rye will be affected the most, reflecting the removal of support prices. However, other crops are also expected to be affected. For example, barley production is expected to increase as rye production becomes less profitable following the elimination of price support. The effects of reforms on production will also depend on the amount of decoupling of support payments chosen by member states. At least 75 per cent of the arable crop payments will be decoupled.

australian commodities > vol. 13 no. 1 > march quarter 2006

crops Growing demand for oilseeds and oilseed products in China have contributed to oilseeds imports increasing from under 1 million tonnes in the mid-1990s to around 29 million tonnes in 2005-06. This has been driven by a rapid increase in vegetable oil consumption per person, doubling since the mid-1990s to 16 kilograms in 2005-06. However, this amount is still relatively low when compared with Chinese Taipei, where vegetable oil consumption per person is around 25 kilograms. It therefore seems that there is significant scope for China’s vegetable oil consumption to increase in the medium term. In the ten years to 2005-06, China’s oilseed meal consumption more than doubled to around 43 million tonnes. Demand for meat, fish and dairy products is expected to continue to increase over the medium term and, with much of this demand being met by expansion of the domestic livestock and aquaculture sectors, the demand for oilseed meal will also increase. According to the USDA, China’s rural financial institutions are channeling large amounts of capital into the country’s agricultural sector as part of a comprehensive policy aimed at boosting agricultural productivity and rural household incomes. Chinese agriculture remains dominated by small farms using little physical capital, but rising investment is helping the sector to diversify. The quality and standardisation of farm products are developing and farms are diversifying into new enterprises such as vegetable and fruit production and aquaculture. As China is one of the world’s largest producers and consumers of grains and oilseeds, changes in domestic consumption and production over the medium term will continue to have a significant impact on world markets.

The Russian Federation During much of the 1990s the Russian Federation was a major importer of grains. However, by early this century they had re-emerged as an exporter on world grain markets. In 2002-03 (when drought affected some of the major exporting countries) the Russian Federation was the world’s third largest wheat exporter. The Russian Government is committed to increasing grain production by improving access to credit, subsidising crop inputs and offering a machinery leasing fund. However, there are a number of constraints that still have the potential to effect the grains over the medium term. These include insufficient storage and transport infrastructure, the uncertainty of property rights and aging, unproductive farm structures. Current port facility upgrades are expected to reduce costs and increase the competitiveness of Russian grains on world markets. A grain terminal with a capacity of 3.6 million tonnes a year is under construction in the sea port of Novorossiysk, and is expected to be completed by the end of 2006. An expansion of grain production in the Russian Federation has also led to increased competition for Australian grain exports into the Middle East. Although wheat quality is generally lower compared with Australian milling wheats, end users are now more willing to purchase lower cost, low quality wheat from a number of sources, rather than rely on one supplier. The grains from different sources are then blended to produce flour of acceptable quality. In the medium term, growth in Russian wheat exports will depend on government policy decisions, productivity improvements, and increased growth in infrastructure investment.

Brazil There has been a boom in agricultural production and exports in Brazil over the past decade. Soybean area, production and exports have more than doubled over this time. This growth in production reflects an increase in the availability of agricultural land, particularly the area planted to soybeans and complementary crops (such as maize and cotton). The area of

australian commodities > vol. 13 no. 1 > march quarter 2006

47

crops soybeans harvested in Brazil increased from around 10 million hectares in 1990 to over 22 million hectares in 2005. The Government of Brazil estimates that there is an additional 90 million hectares of potential cropland that could be used without encroaching on the Amazon rainforest. This potential cropland indicates that in the medium term there is potential for Brazil to expand its soybean industry considerably. In the past the yields for major crops in Brazil were lower than in most other major exporting countries. However, both labor and land productivity have improved significantly, and Brazilian soybean yields exceeded those in the United States for the first time in 2001. Over the medium term, further expansion of the agricultural sector in Brazil may be affected by a lack of transport infrastructure and lack of access to credit facilities for producers.

Australian medium term outlook The area sown to grains, oilseeds and pulses in Australia has increased from around 15 million hectares in the early 1990s to just below 22 million hectares in 2005-06. Over the medium term the area sown to grains, oilseeds and pulses is forecast to increase to 24.5 million hectares. The cropping mix is forecast to remain largely the same over the medium term. Wheat, on average, accounts for 56 per cent of total area sown to crops, followed by coarse grains at 28 per cent, with oilseeds and pulses at 6 per cent and 10 per cent respectively. The agronomic practices required to obtain high oil content in oilseeds crops is more resource intensive than obtaining high quality cereal crops such as wheat and barley. However, the area sown to oilseeds is forecast to increase over the medium term because of the agronomic benefits of oilseeds in cropping rotations. Competition for cropping land largely comes from the sheep industry, particularly in the wheat–sheep zone in Australia. Over the past fifteen years the number of sheep in Australia has fallen by 38 per cent from 170 million in the 1990-91 to an estimated 105 million in 2005-06. This decline in sheep numbers has corresponded with an increase in area sown to grains and oilseeds. Over the medium term, sheep numbers in Australia are Sheep numbers and area sown to crops projected to increase to 108 million. However, this is still historically a low number. Combined with continued productivity Area sown improvements (particularly through innovations in machinery Sheep numbers 20 175 and grain variety), yields are projected to continue increasing over the medium term. Total grains and oilseeds production 15 150 in Australia is projected to be just below 50 million tonnes in 2010-11. As world demand for grains and oilseeds continues to 10 125 increase, Australian exports are forecast to rise. Australian wheat exports are forecast to increase to just under 23 million 100 5 tonnes in 2010-11, up from around 16 million tonnes in million 2005-06. Coarse grains exports are forecast to increase to sheep m ha around 7.5 million tonnes in 2010-11 up from 5.1 million 1965 1974 1983 1992 2001 2010 -66 -75 -84 -93 -02 -11 tonnes in 2005-06.

48

australian commodities > vol. 13 no. 1 > march quarter 2006

contents cotton

> Frank Contact Drum > +61 > +61 2 6272 2 6272 ????2090 > [email protected] > [email protected]

cotton outlook to 2010-11 world prices to remain low in 2006-07 Frank Drum, Ivan Roberts and Lachlan Smirl

> With world raw cotton supplies forecast to exceed demand in 2006-07, the world cotton price (Cotlook ‘A’ index) is forecast to fall by 4 cents to average US53c/lb. Import demand in China will be a dominant factor affecting world raw cotton prices in 2006-07. With cotton production in China expected to increase, a forecast 12 per cent decline in imports is expected to place downward pressure on prices. > Over the medium term, world cotton prices are projected to decline in real terms as productivity improvements in raw cotton production result in significant increases in supply and competition from synthetic fibres remains strong.

World outlook Consumption growth increases prices in late 2005 Larger than anticipated cotton plantings in the northern hemisphere in 2005-06, and a substantial increase in 2004-05 year end stocks resulted in the Cotlook A index easing to US53.5c/lb in August 2005. However, strong import demand from China and speculation that natural disasters in China, Pakistan and the United States may have reduced production in these countries led to the cotton price increasing to over US58c/lb in January 2006. In 2006-07, growth in world cotton production is forecast to exceed growth in demand, leading to an increase in stocks. Reflecting this, the Cotlook ‘A’ Index is forecast to fall by 4 cents in 2006-07 to average World cotton US53c/lb. With growth in world cotton demand forecast to ease over the outlook period and production growth expected to Real price remain steady, world stocks of cotton are expected to remain 120 high over the projection period. Consequently, real cotton 100 prices are expected to ease over the projection period. In 2010-11, cotton prices (in 2005-06 dollars) are projected 80 to be around US49c/lb, 14 per cent lower than forecast 2005-06 prices. 60

Production to increase in 2006-07 Higher world cotton prices in the leadup to the planting of the 2006-07 cotton crop are expected to lead to an increase in the area planted to cotton in China, India and Pakistan. As australian commodities > vol. 13 no. 1 > march quarter 2006

AC_March06_MainBody_[0337] 49

Stocks

10 8 6 4 2

40 USc/lb

1990 -91

Mt

1994 -95

1998 -99

2002 -03

2006 -07

2010 -11 49

27/2/06 10:13:39 AM

cotton these countries account for approximately 47 per cent of the total area planted to cotton, this is expected to result in an increase in the total area planted to cotton worldwide in 2006-07. Average crop yields are also expected to increase over the outlook period, reflecting the rapid adoption of genetically modified cotton varieties and improvements in growing techniques, particularly in India (discussed below). Reflecting these trends, world cotton production is forecast to increase by 4 per cent in 2006-07 to 25.5 million tonnes. China

China is estimated to have produced around 5.3 million tonnes of raw cotton in 2005-06, 16 per cent less than in 2004-05. The key factors behind this fall were a decline in the area planted to cotton and typhoon activity that reduced yields in key cotton growing regions. Higher world cotton prices in 2005-06 and improved returns to Chinese cotton farmers are expected to result in a 7 per cent increase in the area planted in 2006-07. With yields expected to return to levels consistent with recent averages, Chinese cotton production in 2006-07 is forecast to increase by 11 per cent to around 5.9 million tonnes. United States

Cotton production in the United States is estimated to have increased by 2 per cent in 200506 to a record 5.2 million tonnes. This increase was driven largely by a larger area planted to cotton and yields that were around 16 per cent above the five year average. In 2006-07, the area planted to cotton in the United States is expected to fall marginally. With the removal of the US Step 2 farm subsidy program at the end of the 2005-06 marketing year, cotton farmers are expected to take a cautious approach to plantings in the short term (see accompanying box). In addition, improved prices for corn (a close substitute crop) are also expected to lead to a reduction in cotton plantings, particularly in southern states. With a lower area expected to be planted to cotton in 2006-07 and with yields assumed to be consistent with recent averages, cotton production in the United States is forecast to decline by 9 per cent to 4.7 million tonnes.

Productivity improvements to increase yields over the medium term

Indian cotton

4 3 Production 2 1 Mt

1990 -91 50

1994 -95

Over the medium term, increases in world cotton production will be largely contingent on the increased adoption of genetically modified cotton varieties and improvements in cotton growing techniques, particularly in India. The International Service for the Acquisition of Agri-biotech Applications (ISAAA) estimates that the global area planted to transgenic varieties in 2005 was around 9.8 million hectares. As such, transgenic varieties accounted for only around 28 per cent of the total area planted to cotton. Consequently, Area as countries increasingly adopt genetically modified cotton 8 varieties, there is significant potential for further growth in production over the outlook period. 6 Although the area planted to cotton in India is the largest in the world, average yields are around 0.46 bales per 4 hectare — 35 per cent below the world average. However, since 2002-03, yields have increased by over 50 per cent 2 in India, largely from the increased adoption of transgenic cotton varieties. In 2002-03, around 40 000 hectares were mha planted to transgenic cotton varieties in India. In 2005-06, 1998 2002 2006 2010 -99 -03 -07 -11 this had increased to 1.3 million hectares or 14 per cent australian commodities > vol. 13 no. 1 > march quarter 2006

cotton of the total area planted to cotton in India. The increased use of transgenic cotton varieties, particularly in northern India where pest pressure is typically severe, is expected to have a significant impact on improving yields. In addition, reduced pesticide application is expected to lower production costs, increasing operating returns to farmers. Reflecting this, India’s cotton production is projected to total 4.7 million tonnes in 2010-11, around 15 per cent above the current estimate for the 2005-06 crop. In Brazil (the world’s fifth largest producer) the country’s first genetically modified cotton variety was approved in March 2005. While access to these seed varieties was limited in the 2005-06 season, an increase in availability in coming seasons would facilitate yield

WTO decision on US cotton subsidies In 2003 a World Trade Organisation (WTO) panel was established to hear Brazil’s challenge to the legitimacy of US cotton subsidies. Brazil claimed that US cotton subsidies were leading to significantly lower world prices by encouraging surplus production, thereby adversely affecting producers in other countries.

WTO ruling In March 2005, the WTO appellate body ruled that various forms of payments used by the United States contravened WTO rules. The main findings were: > Direct payments in the US cotton support program did not qualify for exemption from WTO commitments to reduce domestic support as they were ruled to be linked to production, prices or inputs. > That the combination of US support payments including marketing loans, user marketing (Step 2) payments and market loss assistance or countercyclical payments contributed to price suppression in the world market for cotton in the 1999–2002 marketing years. > The Step 2 payments made on exports breached WTO export subsidy rules. In addition, the Step 2 payments on domestic sales constituted prohibited import substitution subsidies. > Certain US export credits contravened US export subsidy commitments. In response to the ruling the US Government has committed to eliminating Step 2 subsidies (scheduled for the end of the 2005-06 marketing year) and modified its export credit programs. However, the government has not yet addressed the nonexempt status of its direct payments or the suppressing effects of its payments on world prices.

Expected impact of US response The elimination of Step 2 payments is expected to increase the price of cotton to domestic cotton mills in the United States, thus increasing production costs and lowering domestic consumption. In addition, the increased penetration of clothing imports from China, India and Pakistan following the removal of the Multifibre Arrangement is

australian commodities > vol. 13 no. 1 > march quarter 2006

expected to place further pressure on domestic mills in the United States. As domestic mill consumption declines over the medium term, US exportable cotton surpluses are expected to increase as a greater proportion of US cotton production is traded on international markets. Nevertheless, despite the elimination of Step 2 payments and changes to export credit programs, the remaining provisions under the US farm bill will still provide an incentive to plant. Accordingly, cotton production in the United States is expected to increase over the projection period (in line with further productivity improvements) and US exports are likely to continue to increase.

US raw cotton production Production

5 4 3

Exports

2 1

Domestic use

Mt 1990 -91

1993 -94

1996 -97

1999 -2000

2002 -03

2005 -06

US reponse still incomplete The US responses to the WTO decisions are incomplete at this stage, with the determinations on world price suppression and the exemption of direct payments yet to be addressed. In addition, decisions in the 2007 US farm bill could markedly affect future production and exports. In the long term, the effectiveness of the WTO case will depend on the extent to which the United States changes its support provisions which, in turn, will be influenced by international negotiations and internal politics.

51

cotton increases. In addition, the application of improved fertilisers and chemicals, and better irrigation practices in countries with comparatively less advanced cotton growing practices, is expected to increase productivity over the outlook period. World cotton production is projected to increase by 9 per cent over the outlook period to reach 26.7 million tonnes in 2010-11.

Cotton demand In 2005-06, growth in world cotton consumption is estimated to have increased by over 4 per cent to 24.8 million tonnes, driven largely by an 11 per cent increase in growth in consumption in China, India and Pakistan. Clothing is the primary good produced with cotton. While clothing is a necessity, it is also a semidurable product, the purchase of which can be delayed. Income growth (particularly in developing countries) and the price competitiveness of cotton relative to synthetic fibres are the key factors likely to affect demand for cotton over the outlook period. Lower assumed economic growth in the United States and continued subdued growth in key global economies such as the European Union and Japan are expected to dampen demand for textiles and clothing over the outlook period. However, offsetting this are key developments across a number of developing countries that are significant drivers of the medium term outlook for cotton. Significant economies and cost savings have been achieved through the relocation of textile and clothing manuChina, EU and US agreements on facturing capacity to countries such as China, India, Pakistan textile imports and Bangladesh. Combined with lower cotton fibre costs, Following the expiry of the Multifibre Arrangement lower textile manufacturing costs are expected to translate at the end of 2004, production of clothing and into lower prices and increased demand for end products, textiles in China, India and Pakistan has increased strongly. and hence increased demand from mills for cotton fibre. The rapid expansion in textile and clothing Over the past five years, developing countries are estiexports from China, resulted in the United States mated to have accounted for around 60 per cent of the and European Union signing textile agreements growth in world textile fibre consumption at the end use stage with China to manage the growth of imports of (that is, at the household level). In 2003, household fibre Chinese textiles into these countries. In mid-June 2005 the European Union and consumption in developing Asia was estimated to be 5.6 China signed an agreement to manage the growth kilograms a person, compared with 33 kilograms a person of imports of Chinese textiles to the European Union in the United States. However, with income growth in major until 2008. The agreement on ten product categodeveloping countries such as China and India expected ries of concern limits growth in these categories to to increase strongly over the outlook period, consumers in between 8 and 12.5 per cent a year for 2005, 2006 and 2007. these countries are expected to underpin strong growth in In addition, the United States and China signed world demand for clothing. an agreement in November 2005 that limits growth In 2005-06, raw cotton consumption in China is estiin 34 categories of textile imports from China to mated to be around 9 million tonnes. As such, China will between 10 and 16 per cent a year (for three years account for an estimated 68 per cent of the growth in world beginning in 2006). During the first nine months of 2005, the categories covered by the agreement cotton consumption in 2005-06. China’s consumption of represented 55 per cent of all China’s textile and raw cotton is forecast to increase by around 5 per cent in apparel shipments to the United States. However, 2006-07, to 9.4 million tonnes. With demand expected to the agreement is not expected to cause any major exceed local supplies, China’s net imports in 2006-07 are disruption to growth in clothing and textile producforecast to exceed 3 million tonnes. With cotton demand tion in China over the medium term. Nevertheless, the agreement may result in a further increase in in China forecast to grow strongly over the outlook period, clothing and textile production in India and Pakiimports by China are projected to reach 4.4 million tonnes stan, as these countries take advantage of the trade in 2010-11, around 19 per cent above forecast 2005-06 restrictions imposed against China. levels. 52

australian commodities > vol. 13 no. 1 > march quarter 2006

cotton Reflecting these trends, world raw cotton consumption is forecast to increase by 2 per cent to total around 25.2 million tonnes in 2006-07 and to rise to 26.6 million tonnes by 2010-11.

Cotton and synthetic fibre competition In the raw fibre market, cotton competes directly with synthetic fibres and cellulosics. Significant investment in the Chinese textile and clothing industry has led to polyester production in China tripling since 2000, resulting in excess production capacity. This is believed to be the principal reason why current high oil prices (oil is the major feedstock for polyester production) are not reflected in higher prices for synthetic fibres. However, over the medium term, with oil prices expected to remain relatively high, higher input costs could be expected to pass through into higher prices for synthetic fibres, improving the competitiveness of cotton. That is, cotton is well placed to compete with synthetic fibres over the medium term.

Australian outlook Australian production to rise in the medium term Above average rainfall in a number of areas of northern New South Wales and southern Queensland over the past three to six months has resulted in an improvement in water storage levels in key cotton growing regions. As a result, the area planted to cotton in 2005-06 increased by 4 per cent to around 335 000 hectares. However, despite an increase in the area planted to cotton, Australian cotton production is forecast to fall by 10 per cent in 2005-

Cotton outlook

World

Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

USc/lb USc/lb Mt Mt

68 73 20.70 21.26

52 54 26.22 23.70

57 57 24.46 24.77

53 52 25.50 25.29

58 55 24.49 25.60

54 50 26.19 25.92

59 54 25.29 26.34

55 49 26.69 26.67

Mt

8.75

11.10

11.00

11.21

10.10

10.37

9.32

9.34

%

41.1

46.8

44.4

44.3

39.5

40.0

35.4

35.0

’000 ha kt

198 349

321 645

335 578

350 617

366 669

383 731

401 775

420 825

A$m A$m kt

671 707 459

1 222 1 258 410

1 008 1 008 593

905 883 550

1 099 1 046 615

1 172 1 088 670

1 412 1 279 725

1 415 1 250 771

A$m A$m

982 1 036

770 793

1 012 1 012

889 868

1 042 992

1 110 1 030

1 359 1 231

1 363 1 205

A$/kg A$/kg

2.14 2.26

1.88 1.94

1.71 1.71

1.62 1.58

1.70 1.61

1.66 1.54

1.87 1.70

1.77 1.56

a

Cotlook ’A’ index – nominal – real b Production Consumption Closing stocks Stocks-to-consumption ratio

Australia

c

Area harvested Lint production Value of production – nominal d – real e Export volume Export value – nominal – real e Export unit value – nominal – real e

a August–September years. b In 2005-06 US dollars. c July–June years. d Includes cottonseed value. e In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; US Department of Agriculture; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

53

cotton 06 to 578 000 tonnes. Following record yields in 2004-05, yields are expected to decline by 14 per cent in 2005-06 to southern Qld northern NSW other NSW around 7.6 bales per hectare. January 2005 Over the medium term, availability of water will remain 1200 January 2006 a key constraint on cotton plantings in Australia. The recent Full capacity 1000 implementation of water sharing plans in New South Wales and Queensland, and the finalisation of reductions to ground 800 water allocations in many catchments over the next six months 600 will encourage the industry to research alternative irrigation methods in order to improve water use efficiency. For 400 example, currently AUSCOTT, a major cotton producer in 200 Australia, has been trialing lateral move irrigation systems in GL an attempt to optimise water use efficiency and reduce the Fairbairn Beardmore Pindari Keepit Wyangala costs of inputs. Early results from the trials have indicated that Copeton Burrendong Glenlyon Leslie the lateral irrigation systems use 30 per cent less water. Consequently, it may still be possible for the area planted to cotton to increase over the outlook period if cotton growers purchase additional water or increase the efficiency with which they use water. However, the ability to increase plantings will be largely dependent on average seasonal conditions.

Water storage and availability

54

australian commodities > vol. 13 no. 1 > march quarter 2006

contents sugar

> Stuart ContactKinsella > +61 > 2 +61 62722 ???? 6272 >4778 [email protected] > [email protected]

sugar outlook to 2010-11 prices to increase in 2006-07 Stuart Kinsella

> The world indicator raw sugar price is forecast to increase by 6 per cent to average US17.4c/lb in 2006-07. World consumption is forecast to exceed world production for a fourth consecutive year. > World raw sugar prices are projected to decline in real terms to 2010-11, but to remain higher than previously forecast. Increased ethanol production in Brazil and reform of the EU sugar industry are expected to support world sugar prices over the medium term.

World outlook The world indicator price for raw sugar (New York no. 11 raw spot, fob Caribbean) is forecast to increase by 6 per cent in 2006-07 to average US17.4c/lb, continuing an upward trend that has resulted in prices rising by more than 150 per cent since early 2004. World sugar consumption is forecast to exceed production for a fourth consecutive year, leading to a further decline in world stocks in 2006-07. Over the outlook period to 2010-11, a number of factors are expected to support world sugar prices. These include growth in the demand for ethanol as an alternative fuel source, and substantially lower production and exports of sugar from the European Union. Although declining in real terms toward the end of the outlook period — based on the assumption that major producing countries such as Brazil and India have the capacity to increase production of sugar over this period — raw sugar prices are forecast to remain historically high. The world World raw sugar price indicator price for raw sugar is forecast to average around New York no.11 spot, fob Carribean ports US11.5c/lb (in real terms) in 2010-11.

Developments in key markets World sugar production is forecast to increase by 1 per cent in 2006-07 to total around 152 million tonnes. Despite higher anticipated production in India and Brazil and to a lesser extent Thailand, substantially lower production in the European Union is the major reason why growth in world production is forecast to be modest in 2006-07.

Brazil the key to movements in world sugar prices In Brazil, sugar cane production is forecast to increase by around 8 per cent in 2006-07 to around 420 million tonnes, australian commodities > vol. 13 no. 1 > march quarter 2006

20 15 10 5 2005-06

USc/lb

1990 -91

1994 -95

1998 -99

2002 -03

2006 -07

2010 -11

55

sugar which would constitute another record from the world’s largest producer and exporter of raw sugar. Rainfall in the north east of the country in late December is expected to benefit the crop in 2006-07, while a substantially higher area is forecast to be sown to cane in the centre south of the country, the major cane producing region. A number of new mills are also expected to come online in 2006-07 — particularly in the centre south — which will add significant crushing capacity to the domestic industry. A key determinant of the quantity of sugar produced in Brazil remains the influence of world oil prices on Brazil’s sugar cane based ethanol industry. The sustained rise in world oil prices since early 2004 has meant that ethanol is an increasingly competitive substitute (or extender) of traditional oil based fuels. Growth in sales of flex-fuel cars, which are able to run on 100 per cent gasoline, 100 per cent ethanol or a combination of both, has led to substantially higher demand for ethanol in Brazil in recent times. As demand for ethanol has increased in line with higher world oil prices, a higher proportion of sugar cane is being diverted toward the production of ethanol and away from sugar production. Domestic ethanol prices have increased to such a degree that in early 2006 the Brazilian Government and ethanol World oil and sugar prices producers agreed to lower wholesale ethanol prices by Monthly, ended January 2006 around 3 per cent, to reduce inflationary pressures on the economy. 250 Over the medium term, the extent to which Brazil can continue to keep pace with growing demand for ethanol Oil 200 is expected to be a major factor determining movements Sugar in the world sugar price. Sales of flex-fuel cars are forecast 150 to continue growing rapidly in Brazil, with some estimates 100 suggesting that flex-fuel cars could comprise more than 30 per cent of the light vehicle fleet by 2010-11. As such, demand 50 for ethanol in Brazil is expected to continue increasing strongly over the medium term. index In late January 2006 the Brazilian Government announced Dec Dec Dec Dec Dec Dec that investment of US$10 billion would be needed over the 2000 2001 2002 2003 2004 2005 next five or six years to increase the area planted to sugar cane and to construct 73 new mills to ensure that increased domestic and world demand for ethanol (and sugar) is met. Most of the expansion in area planted is likely to occur in the centre south of the country, where cane plantings have the potential to expand to twice their current area in the future. Higher sugar prices are forecast to lead to a significant supply response from producers in 2006-07. Sugar production in Brazil in 2006-07 is forecast to increase by 4 per cent to around 31 million tonnes. Sugar exports are forecast to increase by 3 per cent to almost 20 million tonnes. Despite expectations that Brazilian ethanol production will increase significantly over the medium term, sugar production and sugar exports from Brazil are also forecast to increase over the outlook period, reflecting the strong expected growth in sugar cane production. Higher sugar production and exports from Brazil are forecast to place downward pressure on world sugar prices, particularly toward the end of the outlook period. Growth in the Brazilian sugar industry is also likely to increase Brazil’s dominance in the world sugar market, particularly with lower production and exports expected from the European Union over the medium term. Brazil currently accounts for around 40 per cent of world trade, and this proportion is expected to increase over the medium term. 56

australian commodities > vol. 13 no. 1 > march quarter 2006

sugar Higher production expected in India and Thailand in 2006-07 Sugar production in India is forecast to increase in 2006-07, largely reflecting the higher area planted to sugar cane and additions to crushing capacity by a number of mills. After severe drought and insect infestations restricted the domestic availability of sugar cane in the 2003-04 and 2004-05 seasons, good monsoon rains were received in most cane growing regions in mid-2005. In association with increased demand for ethanol and improved returns for cane producers, the area sown to cane is estimated to have increased by 11 per cent in 2005. Reflecting this, sugar production is forecast to increase by 7 per cent to around 21 million tonnes in 2006-07. Indian mills are likely to benefit from high world sugar prices in 2006-07 as they fulfil their export obligations under the Advance License Scheme. Under the scheme, mills were permitted to import raw sugar during the drought years under the proviso that a similar quantity of refined sugar was re-exported within 24 months. As domestic production is forecast to exceed consumption for the first time in three years, and as the level of stocks appear Thailand sugar adequate to cover any unforeseen short term shortages, India is forecast to return to being a net exporter of sugar in 2006Production 07. Exports 6 Sugar production in Thailand is also forecast to increase marginally in 2006-07 to more than 5 million tonnes, with rain in late 2005 likely to boost the sugar cane crop in 2006. 4 Production in Thailand peaked at around 7.7 million tonnes in 2002-03. However, since that time output has declined 2 steadily as a result of drought and the substitution by growers into alternative drought resistant crops. Despite higher forecast cane and sugar production in 2006-07, significant investMt ment in the development and production of alternative fuels, 1998 2000 2002 such as ethanol, is likely to restrict growth in sugar production -99 -01 -03

2004 -05

2006 -07

Sugar outlook

World

Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

Mt Mt Mt

143.0 144.5 64.6

144.4 147.6 61.4

149.7 150.6 60.5

151.5 153.3 58.7

155.5 156.4 57.8

159.3 159.6 57.5

163.0 162.7 57.8

165.7 165.6 57.9

USc/lb USc/lb

7.9 8.4

10.5 10.8

16.4 16.4

17.4 16.9

16.1 15.3

14.7 13.7

13.6 12.4

12.8 11.5

kt kt

4 994 4 060

5 196 4 271

5 108 4 121

5 203 4 197

5 330 4 262

5 341 4 270

5 353 4 279

5 360 4 284

A$m A$m

982

1 140

1 913

2 156

2 175

2 125

2 037

1 955

1 035

1 174

1 913

2 103

2 070

1 973

1 845

1 728

a

Production Consumption Stocks b Price – nominal – real c

Australia

d

Production e Export volume Export value – nominal – real g

a October–September years. b Historical estimates of closing stocks are based on individual country estimates of production, consumption, trade and stocks. Given possible under/over reporting of statistics in individual countries, changes in world closing stocks from year to year may not necessarily equal the difference in world production and world consumption. c In 2005-06 US dollars. d July–June years. e Raw tonnes actual. g In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Sugar Organisation; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

57

sugar in Thailand. Nevertheless, in line with higher production, exports from Thailand are forecast to increase marginally in 2006-07.

Lower production in the European Union Reform of the domestic sugar industry in the European Union is expected to lead to a substantial decline in production and exports in 2006-07. This is the key reason why world production is forecast to grow only modestly in 2006-07 despite high world sugar prices. Reform of the domestic European sugar industry is necessary after a ruling by the World Trade Organisation that the European Union must limit its export subsidies to 499 million euros (A$812 million) on a maximum quantity of 1.273 million tonnes of sugar a year. From 22 May 2006 the European Union must also include the re-export of around 1.6 million tonnes of sugar imported from African, Caribbean and Pacific (ACP) countries and India in its maximum limit of subsidised sugar exports. Among other things, the reforms to the domestic European industry include a 36 per cent reduction in the EU intervention price over a period of four years. Despite the announcement of a 6 billion euro compensation package for domestic producers, the reforms are likely to result in the viability of Effect of EU sugar reform on production and sugar beet production coming under intense pressure in a exports in 2006-07 number of member countries, including Italy, Portugal and Greece. Furthermore, despite a 40 million euro compensaProduction tion package, sugar industries in a number of ACP countries Exports 20 are also likely to come under pressure given the reduction in the EU intervention price. Under current arrangements these 15 countries are able to export sugar to the European Union and receive the higher internal price. 10 Production in the European Union is forecast to fall below 18 million tonnes in 2006-07, around 17 per cent lower than 5 that produced in 2005-06. Over the medium term, production is expected to decline further as inefficient producers move Mt out of sugar beet production, and sugar industries contract in 2003 2004 2005 2006 a number of member countries. By 2010-11, beet production -04 -05 -06 -07 in the European Union is expected to be concentrated in the most efficient member countries such as France and Germany. Sugar exports from the European Union are forecast to decline by around 4 million tonnes in 2006-07, representing a fall in world trade of around 9 per cent. Over the outlook period, exports are projected to continue to decline.

Developing economies to drive growth in consumption World sugar consumption is forecast to increase by around 2 per cent in 2006-07 to 153 million tonnes. This is in line with assumed high rates of economic growth and rising incomes in developing economies, particularly in Asia, where the per person consumption of sugar remains low compared with the world average. Demand for imports is forecast to remain high in 2006-07 in China and Pakistan, as well as in the United States, where hurricanes damaged sugar cane crops in late 2005 and led to a decline in domestic sugar production. Over the outlook period world sugar consumption is forecast to continue to grow at around 2 per cent a year, which is consistent with the trend observed over the past decade. In China, sugar consumption is forecast to grow by around 5 per cent to 13 million tonnes in 2006-07. Demand for sugar is forecast to increase largely as a result of higher incomes, which are changing patterns of food consumption and, in particular, leading to 58

australian commodities > vol. 13 no. 1 > march quarter 2006

sugar higher consumption of soft drinks and confectionery. Although the availability of artificial sweeteners has had a significant impact on China’s sugar consumption in the past, Chinese consumers have a relatively strong preference for sugar and tend to reduce consumption of artificial sweeteners as incomes rise and sugar becomes more affordable. Sugar imports by China are forecast to exceed 2 million tonnes in 2006-07, as any further significant expansion in the area sown to sugar cane and sugar beet is restricted by the availability of arable land. While imports are forecast to increase, the Chinese government may also choose to release sugar from stocks to reduce domestic prices which have risen strongly in recent times. China is currently estimated to hold around 2 million tonnes of sugar stocks. Over the outlook period, China is forecast to emerge as a significant importer of sugar. Per person consumption in China is currently far lower than the world average, a result of a number of factors including traditional dietary habits, low incomes and the use of substitute sweeteners. This is also the case in India, where higher incomes and increased demand for sugar are expected to result in higher per person consumption of sugar over the period to 2010-11. Demand for imports by Pakistan is forecast to remain high in 2006-07 as domestic consumption is forecast to exceed production for a third consecutive season. In 2004-05 and Sugar consumption per person 2005-06, domestic production fell as a consequence of unfavorable weather conditions, leading to significantly higher World domestic prices and higher imports in those seasons. 20 Hurricanes in the United States in late 2005 are also expected to adversely affect the 2006-07 crop, given the India 15 significant damage to sugar cane, and in particular the root systems, in areas such as Florida and Louisiana. Although 10 the domestic deficit between production and consumption China is expected to have widened in 2005-06, imports into the 5 United States to service the deficit have been restricted by quotas that prevent sugar moving freely into the country. In late kg/yr 2005, the United States increased the import quota for sugar 1996 1998 2000 2002 2004 2006 by 450 000 short tons. Given the time estimated for cane in parts of the United States to recover from damage, and the adverse effect on domestic production, demand for imports is forecast to remain strong leading into 2006-07. In the Russian Federation — the world’s largest importer of sugar — sugar production has increased for the past four seasons despite a lower area sown to sugar beet. Higher production reflects improvements in production techniques and higher yields, and in association with a decline in total consumption in recent years, means that the level of imports into the Russian Federation has remained flat at around 4 million tonnes for the past few seasons. In 200607, domestic production is again forecast to increase by a small margin as yields continue to improve, meaning that total imports may decline marginally from the 2005-06 season.

Australian outlook Improved returns for Australian growers in 2006-07 In 2005-06, total cane production in Australia increased by around 2 per cent to just over 38 million tonnes, the highest in six years. However, in Queensland — where more than 90 per cent of Australia’s sugar cane is produced — wet conditions in mid-2005 reduced CCS australian commodities > vol. 13 no. 1 > march quarter 2006

59

sugar (commercial cane sugar) content and resulted in total sugar production declining marginally from the 2004-05 level. The wet conditions also meant that the end to the crushing season was delayed by up to a month in some regions in Queensland, which may have some impact on the crop for 2006-07. In recent years the area sown to sugar cane in Australia has declined, particularly in Queensland, as growers have diversified into alternative crops. In 2006-07, a small increase is expected in the area sown to sugar cane in Australia, reflecting expectations of improved returns to growers in the coming season. However, a substantial increase in the area sown to cane is unlikely given the high cost of inputs such as fertiliser and fuel, and limited short term availability of land on which to expand production. The cost of water is also likely to increase in 2006 after the Queensland Government announced a new $4 per megalitre charge for licensed irrigators. Australian sugar cane production is forecast to increase to around 38.3 million tonnes in 2006-07, while sugar production is forecast to increase by around 2 per cent to 5.2 million tonnes. With world sugar prices forecast to increase by a further 6 per cent in 2006-07, the value of Australia’s sugar exports is expected to increase by 13 per cent. In late 2005 the Queensland Government introduced legislation to end the single desk marketing system, a feature of the Queensland sugar industry where all export rights for raw sugar were held by Queensland Sugar Limited (QSL). Under the new arrangements export marketing of sugar in Queensland will be contractually, rather than statutorily based. In effect, this means that the sugar market is now deregulated. However, at least 95 per cent of sugar produced for export in Queensland in 2006 is still expected to be sold through QSL, given that most mills in Queensland have signed new contracts with QSL. Over the medium term to 2010-11, the Australian sugar industry still faces a significant challenge to maintain and improve competitiveness in a volatile world market, particularly as the market dominance of Brazil is projected to increase over this period. Despite the improved price outlook, further investment from cane growers and millers is required to improve profitability and sustainability over the medium term. Australian sugar production is projected to increase to around 5.4 million tonnes in 201011, driven by higher yields and a higher CCS content rather than from a substantial increase in the area planted. With sugar prices projected to remain relatively attractive in the near term, some land can be expected to move from alternative crops into sugar. The extent to which this occurs will be substantially affected by grower expectations about the sustainability of improved prices in what is typically a volatile market. Australian sugar exports are projected to increase to around 4.3 million tonnes in 201011. However, with world sugar prices expected to ease over the medium term, the value of Australian sugar exports is projected to decline to around $1.7 billion in real terms (2005-06 dollars) in 2010-11.

60

australian commodities > vol. 13 no. 1 > march quarter 2006

contents sheep

> Vince Contact O’Donnell > +61 2 > 6272 +61 ???? 2 6272 > [email protected] 2255 > [email protected]

sheep industry outlook to 2010-11 both wool and meat production critical to the industry’s future Vince O’Donnell, Andrew Dickson and Anton Wood

> Sheep flock rebuilding is expected to continue gradually over the medium term, with sheep meat production expected to be an important influence on wool production. > Wool prices are projected to decline in real terms over the medium term as competition from other fibres continues. > Lamb prices are forecast to remain firm for the remainder of 2005-06 before gradually easing as the United States re-enters the Japanese beef market and the price of red meat generally declines as supply increases. > Live sheep exports are expected to continue to rise following the lifting of the bans on shipments to Saudi Arabia.

Challenges continue for the sheep industry The sheep industry continues to be an important part of Australia’s agricultural economy, with combined export revenue for the wool and sheep meat sectors of over $4 billion in 200405. Since the early 1990s the wool clip in Australia has declined by almost 50 per cent and the flock by almost 40 per cent. Australia’s sheep flock fell below 100 million for the first time since 1946 during the 2002-03 drought, but has since recovered to around 103 million in 2005. However, while sheep numbers and wool production have declined (markedly so since 1990-91 in the case of wool production), lamb production has increased, representing a significant shift in the makeup of the sheep industry. Index of wool and lamb production As recently as 1990, approximately 90 per cent of the value of wool and sheep meat production came from wool sales. In 2004-05, wool’s share had reduced to almost 60 Wool 150 Lamb per cent. While in the past lamb might have been consid125 ered a co-product of wool production, the prospects for the Australian wool industry are now increasingly bound up in 100 both fibre and lamb markets (and the markets for meats more generally). 75 The strengthening in prices in early 2006 resulted in the 50 Australian eastern market indicator rising significantly in early January after several years of declining prices. With prices index having dropped below 640 cents a kilogram in late 2005, 1980 1985 1990 1995 2000 2005 2010 the recent rise in the wool prices is forecast to result in the australian commodities > vol. 13 no. 1 > march quarter 2006

61

wool indicator price averaging 700 cents a kilogram in 2005-06. In the medium term and compared with prices in 2005-06, wool prices are projected to decline by around 9 per cent in real terms as production increases in response to higher sheep numbers, demand continues to retreat and competition from alternative fibres remains intense.

Wool The demand for wool is a derived demand, dependent on the final demand for woollen textiles and clothing. As such, the outlook for the Australian wool industry is integrally bound up in the outlook for world fibre demand and how successfully wool competes with other fibres, both at the processing and manufacturing stage, but also critically at the end use or retail stage. World fibre production has been increasing over many years. In 1990, total world fibre production was estimated to be 39 million tonnes, with wool accounting for 5.2 per cent. In 2004, total world fibre production rose to around 58 million tonnes, with wool accounting for 2.1 per cent of the market. That is, wool has not only lost market share relative to other fibres such as cotton and synthetics, but the worldwide production of wool has also declined in absolute terms (by approximately 40 per cent). Over the same period, wool prices are estimated to have declined, in real terms, by 30 per cent. In textiles manufacturing there is a high degree of substitutability between various fibres, including wool, cotton and Total gross value of production synthetic fibres, such as polyester and acrylic. The international textiles and clothing industry is fiercely competitive and, at the margin, manufacturers are very responsive to changes Wool in supply and demand conditions affecting the relative costs 10 Sheep meat of fibres and will alter fabric blends accordingly. 8 Since the mid-1970s the relative price of wool to cotton and the relative price of wool to polyester (in real terms) has 6 tended to keep within a band of 2.0–3.0, although it might be concluded that a slight upward trend is evident in the 4 data. The main exceptions over this period include: a sharp 2 increase in the price of wool in the late 1980s and more 2005-06 recently (since 2000) when these ratios escalated sharply, $b reflecting cost reductions that were achieved in the manu1980 1985 1990 1995 2000 2005 2010 facturing of both synthetics and cotton — associated with significant investment in new capacity, particularly in China — as well as reductions in the cost of producing raw cotton Price ratios associated with increased adoption of GM varieties. Based on the outlook for wool, cotton and oil prices (oil Wool/ Wool/ cotton polyester is the major feedstock in the manufacture of synthetics), the 5 price of wool relative to synthetics and the price of wool rela4 tive to cotton are both expected to decline in coming years, improving the cost competitiveness of wool. 3 However, relative prices are not the only key driver behind a shrinking demand for wool. Rather, changes in consumer 2 tastes and preferences are more likely to be behind the signifi1 cant contraction in the global demand for wool, and hence are also likely to be the key determinants of the medium term 0 outlook for wool. 1980 1985 1990 1995 2000 2005 2010

62

australian commodities > vol. 13 no. 1 > march quarter 2006

In looking at changing tastes and preferences it is useful to Wool exports, by destination distinguish between established markets for wool (principally the United States, western Europe and Japan) and emerging 1997-98 and new markets (particularly China). 799 kt Throughout the 1980s and 1990s a key retail sector for China 2004-05 174 kt Other wool was high quality clothing, most notably woollen suits, 513 kt 22% 152 kt China 19% with much of the fabric designed and produced in western Other 256 kt Europe. Key markets for high quality woollen apparel were 80 kt 50% 16% the United States, western Europe and Japan. In 2005, around 60 per cent of the world trade in menswear and 55 Other Asia 165 kt Other Asia per cent of the world trade in womenswear were imported 21% Europe 77 kt by the United States, Japan and Germany. While economic 307 kt 15% 38% Europe growth in the period since 1990 has been relatively strong 101 kt in the United States, economic growth in Japan and western 20% Europe has been mixed. Moreover, for an extended period during the late 1990s and early 2000s, economic growth in all three markets was modest and contributed to easing world demand. However, during this time (and particularly more recently), significant cost reductions were achieved in the manufacture of woollen textiles and apparel as existing capacity in Europe was relocated, particularly to eastern Europe, and new production capacity was established in China. The technology and skills required to produce and finish high quality fabrics has also become increasingly available to producers in places such as China. The changes in the location of the world’s woollen apparel manufacturing base is reflected in the changing destination of Australian wool exports. In 1997-98, around 38 per cent of Australia’s wool was exported to Europe and 22 per cent was exported to China. By 200405, these shares had changed to 20 per cent and 50 per cent respectively.

Australian wool outlook Unit

2003 -04

Eastern market indicator (clean) Ac/kg 820 – nominal Ac/kg 865 – real a Ac/kg Auction price (greasy) 533 million 101 Sheep numbers b million 105 Sheep shorn kg 4.51 Cut per head Wool production (greasy) kt 475 – shorn kt 48 – other c kt 523 – total Total closing stocks d kt – weight (greasy) 156 Wool exports (balance of payments basis) kt – volume (greasy equiv.) 475 A$m 2 778 – nominal value A$m 2 930 – real value a

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

746 768 485 103 108 4.42

700 700 455 105 109 4.37

671 655 436 107 110 4.38

668 636 434 107 111 4.38

682 633 443 107 111 4.38

692 627 450 108 112 4.37

720 637 468 108 112 4.39

475 50 525

476 52 528

483 54 537

485 54 540

487 55 542

489 57 546

490 59 549

157

158

159

159

154

149

145

515 2 838 2 922

525 2 642 2 642

534 2 579 2 517

540 2 593 2 468

548 2 682 2 490

551 2 744 2 486

555 2 877 2 542

a In 2005-06 Australian dollars. b Closing sheep and lamb numbers at 30 June. c Includes wool on sheepskins, fellmongered and slipe wool. d Privately held stocks of unsold wool. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Australian Wool Exchange; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

63

wool Consumer tastes Lifestyle changes are having a major influence on the demand for textiles and apparel, and hence on the demand for wool. One example is the trend toward more casual wear which has tended to favor nonwool apparel. As the balance between casual wear and formal and office wear continues to change, there is a risk that traditionally large markets for woollen clothing could become increasingly niche. Another example of where lifestyle changes are having a significant impact is through changes in the way thermal comfort around the home is approached. Improvements across a wide range of fronts have significantly reduced the demand for rugs, quilts, overcoats and other heavier weight clothing. These include: construction materials that allow more open and flexible housing designs; improved insulation materials that reduce diurnal temperature variations; improved solar passive designs; and developments in the design and significant reductions in the cost of equipment such as reverse cycle air conditioners and gas central heating. Another important factor is the way in which synthetic fabrics have developed to achieve the functionality of wool (breathable, water repellent and durable) but have also combined this with being light weight and smooth (particularly close to the skin). The increase in and the popularity of lightweight synthetic apparel in outdoor activities is one such example. Across a range of commodities and particularly in the case of minerals and energy commodities, sustained high levels of economic growth in China have underpinned substantial growth in both the value and volume of Australian exports. In addition, in the future, China will be a key engine for growth in Australia’s commodities markets. However, in the case of wool, China is not providing similar impetus. Research undertaken by Woolmark Intelligence (reported in late 2005) revealed that ‘between 1997 and 2005 fewer consumers in China thought wool apparel was fashionable, stylish, of high quality, value for money and worth paying extra for’. Hence, while China is seen as the driver of demand for other sectors, there is some doubt about how much it will change the demand for wool in both the short and medium term.

Medium term outlook for demand Over the medium term, positive economic growth, particularly in the key economies of the United States, Japan and western Europe, is expected to support growth in demand for some key product lines, such as office wear in Japan and casual wear in the United States. However, with the rates of economic growth assumed to prevail over the medium term it is difficult to imagine the market for high quality woollen clothing obtaining any significant traction over the outlook period. Over the medium term the costs of manufacturing woollen fabrics are also expected to continue to be pushed down as capacity is increasingly relocated to low cost centres, such as in eastern Europe, south Asia and China. However, with similar trends expected in the manufacture of synthetic and cotton textiles, woollen fabric producers will be doing well to hold ground. The inescapable conclusion is that consumer preferences and tastes have changed and are likely to continue to change, at least over the medium term, with cotton and synthetic fibres increasingly preferred to wool. Where this ultimately leaves the Australian wool industry in the longer term is a critically important question.

Wool supply Australia remains the world’s dominant producer and exporter of wool, accounting for around 25 per cent of the world’s greasy wool production. Australia is forecast to produce around 64

australian commodities > vol. 13 no. 1 > march quarter 2006

wool 529 000 tonnes of wool in 2005-06 from 105 million sheep. Most of this wool will be exported with over half destined for China for the production of textiles and apparel for domestic consumption and exports. As well as being the largest market for Australian wool, China is also the world’s second largest wool producer. In 2004, China is estimated to have accounted for 16 per cent of the world’s greasy wool production. However, China’s production of 341 000 tonnes came from a total of 157 million sheep — that is, production on a per head basis in Australia is more than double that in China. While most of China’s wool does not compete directly with Australia’s finer wool, it is nevertheless a reminder to Australian producers of the potential competition that exists and the ongoing need to strive for productivity improvements. Between 1992-93 and 2002-03, wool prices weakened relative to other commodity prices, resulting in Australian producers reducing sheep numbers by 27 per cent to around 100 million. According to ABARE’s Australian agricultural and grazing industries survey much of this contraction occurred in the wheat–sheep zone, where producers have the greatest potential to diversify into a range of agricultural enterprises, including grains, beef cattle, lambs and sheep for slaughter. With favorable grain prices and the need to maintain profitability during this period, sheep producers in the wheat-sheep zone reduced sheep numbers by 30 per cent and expanded the area sown to crops by 12 per cent. In contrast, sheep Australian broadacre sheep flock, by zone numbers in the pastoral zone remained largely unchanged until 2002 when drought resulted in a heavy reduction in the All zones sheep flock. Between 2000-01 and 2002-03, the number of 120 sheep in the pastoral zone fell by 34 per cent to 11 million. However, given favorable seasonal conditions and a rela90 tively positive outlook for sheep meats, it is projected that sheep numbers will gradually recover to around 108 million Wheat–sheep zone 60 by 2009-10. As a result wool production is also likely to increase gradually over this period. High rainfall zone 30

Pastoral zone

Change in micron, by zone Over the past decade the average diameter of merino wool produced in Australia (measured in microns) fell steadily. Moreover, the proportion of the clip that measured 19 microns or less increased from 13 per cent to 32 per cent. According to ABARE survey data the average diameter of the main merino fleece line produced on broadacre farms that are mainly dependent on wool (that is, where over 50 per cent of farm receipts come from wool sales), fell from 21.2 microns in 1992-93 to under 20.1 microns 200203. In comparison, on broadacre farms with a greater focus on sheep meat production, the average micron of the main merino fleece line has remained relatively unchanged. The reduction in the average diameter of the main merino fleece line was greatest in the high rainfall regions of Australia. This reflects a gradual change in the flock structure as well as selection of finer wool producing sheep. As lamb and sheep slaughter prices rose, producers also increased their focus on sheep meat production resulting in sheep flocks with a lower

australian commodities > vol. 13 no. 1 > march quarter 2006

million 1992 -93

1994 -95

1996 -97

1998 -99

2000 -01

2002 -03

Share of total clip 1994-95 2004-05

20 15 10 5 % 30 -30 65

lamb Average merino wool micron Average per farm

Predominantly sheep meat producers

22

21 Predominantly wool producers

20

micron 1992 -93

1994 -95

1996 -97

1998 -99

2000 -01

2002 -03

Lamb

Average merino wool micron Average per farm Pastoral zone 22 Wheat–sheep zone

21

High rainfall zone

20

micron 1992 -93

1994 -95

1996 -97

1998 -99

2000 -01

2002 -03

Australian lamb

400

300 Real price Production

200

300

200

100 2005-06

c/kg

kt 1994

1998

66

AC_March06_MainBody_[0337] 66

2002

proportion of wethers and a high proportion of younger ewes and hoggets that produce finer and lighter fleeces. Producers in the wheat–sheep zone have the greatest potential to diversify into a range of agricultural enterprises, including grains, beef cattle, wool, lambs and sheep for slaughter. In this case, as wool prices fell, producers responded by reducing wool production and expanding more profitable enterprises, rather than focusing heavily on improving wool quality. Conversely, in the pastoral zone, little change was observed in the average micron of the main fleece line until 2002, when destocking in response to drought resulted in heavy culling and substantial change to the flock composition and reduced feed availability resulted in a degree of hunger fineness in the clip.

2006

2010

Australian saleyard lamb prices are forecast to remain relatively high in 2005-06, averaging 348 cents a kilogram. This figure is higher than forecast in December 2005 and reflects the continuation of high beef prices caused by the reduction in red meat supply following the reimposition of bans on US beef into the Japanese market (see the beef note in this issue of Australian Commodities for a more detailed discussion of the US–Japan beef trade situation). While autumn 2005 was very dry, the seasonal conditions in many areas improved significantly in winter and spring, contributing to some increase in lambing percentages and improved condition of spring joined ewes. Combined with favorable prices for lamb, producers have been encouraged to increase both sheep numbers and lamb production. Lamb production is forecast to reach 382 000 tonnes in 2005-06 and gradually increase to 447 000 tonnes over the outlook period. This reflects the continuing trend for many wool producers to turn their focus to sheep meat production. In the period to 2010-11 the saleyard price of lamb is projected to decline by around 14 per cent in real terms. Nevertheless, while lamb prices are expected to ease in real terms, they are still projected to remain above the levels achieved throughout the 1990s.

Export demand strong in key markets Strong export demand for lamb over the past few years has provided a major impetus for the expansion of Australia’s lamb industry. In 2004-05, lamb exports totaled a record 120 000 tonnes (shipped weight), valued at $700 million. This strong growth has been aided by falling production in the United States and Europe, limited growth in exports from New australian commodities > vol. 13 no. 1 > march quarter 2006

7/3/06 2:05:50 PM

lamb Zealand and increased demand in Asia as disease concerns disrupted trade in beef and chicken. It is expected that strong demand for Australian lamb will continue throughout 200506, with exports forecast to reach 142 000 tonnes (shipped weight). Over the medium term total exports are projected to rise steadily before leveling off toward 2010-11.

Lamb exports

150

100

United States

Australia’s main lamb export market continues to be the United States, with around 28 per cent of shipments being destined for that market in 2005-06. Total Australian export volumes to the United States have been rising steadily by an average over the past five years of 15 per cent a year. Further increases are expected over the medium term, with exports projected to reach 47 000 tonnes by 2010-11. However, growth in lamb exports to the United States will be hampered

50

kt 1990

1994

1998

2002

2006

2010

Australian sheep meat outlook Unit

2003 -04

Saleyard price for sheep – nominal – real a

Ac/kg Ac/kg

199

162

165

164

163

162

161

160

210

167

165

160

155

150

146

141

Saleyard price for lambs – nominal – real a

Ac/kg Ac/kg

372

344

348

346

345

343

342

340

393

354

348

338

328

319

309

301

Retail price for lamb – nominal – real a

Ac/kg Ac/kg

1 142

1 169

1 173

1 192

1 212

1 232

1 252

1 274

1 205

1 203

1 173

1 163

1 153

1 144

1 135

1 126

Sheep numbers b

million

101

103

105

107

107

107

108

108

’000 ’000

10 421 16 562

11 443 17 331

11 500 18 176

11 730 18 908

11 960 19 033

12 190 19 350

12 420 20 155

12 650 21 000

kt kt

220

237

239

244

249

253

258

263

341

354

382

399

403

410

428

446

Slaughterings Sheep Lamb Production c Mutton Lamb Consumption per person Mutton Lamb Exports Mutton exports d Lamb exports d – to United States Lamb export value d – nominal – real a Live sheep exports

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

kg

2.4

2.6

2.5

2.6

2.6

2.6

2.6

2.6

kg

10.4

10.1

10.7

11.0

11.0

11.1

11.5

11.5

kt kt kt

120 109 32

145 120 36

145 142 38

147 150 40

150 152 41

153 156 42

156 165 44

159 174 46

$m $m ’000

636 671 3 843

700 721 3 233

782 782 4 468

827 807 4 850

841 800 5 100

866 804 5 150

920 833 5 200

941 832 5 250

a In 2005-06 Australian dollars. b At 31 March on establishments with an estimated value of agricultural operations of $5 000 or more in 1998-99, and at 30 June thereafter. c Carcass weight. d Fresh, chilled and frozen, shipped weight. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Department of Agriculture, Fisheries and Forestry; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

67

mutton by expected declines in beef prices in that market, and increased competition from all the major meats. Asia

Exports to Asia, and in particular to Japan, have been rising rapidly over the past year, which will reflect, at least in part, disruptions to the Japanese–US beef trade. Following the reimpostion of bans on US beef in early 2006, both beef and lamb prices are expected to remain firm for the remainder of 2005-06 before easing in 2006-07. In 2005, Asia accounted for around 23 per cent of Australia’s total lamb exports. This compares with around 16 per cent in 2001. Exports to both China and Japan, the two largest destinations for lamb in Asia, have both doubled in the past five years. Both these markets are likely to overtake the European Union as destinations for Australian lamb. Exports to Japan reached record levels in 2005, rising by over 50 per cent to around 10 900 tonnes. New Zealand

New Zealand is the world’s largest lamb exporter. New Zealand lamb exports increased in 2004-05 to 302 000 tonnes (shipped weight). With profitability continuing to favor sheep meat production, New Zealand’s sheep flock is reported to have increased in 2005 to just under 40 million. In 2002-03 it had dropped to around 39 million from over 49 million in the mid-1990s In the medium term, New Zealand sheep numbers are forecast by the New Zealand Ministry of Agriculture and Forestry to remain relatively constant despite expectations of higher prices and a significant increase in EU import quotas. Lamb exports are expected to increase gradually, largely as a result of productivity increases.

Mutton As the national flock continues to rebuild following the 2002-03 drought, mutton prices are likely to remain relatively buoyant, aided by the increase in live sheep exports. Saleyard prices for sheep are forecast to average 165 cents a kilogram in 2005-06 and are projected to decline gradually over the medium term. Strong demand from restockers and the live sheep trade following the improvement in seasonal conditions in the second half of 2005 contributed to a rise in saleyard prices of sheep. However, in recent months, prices have declined as demand eased with the onset of dry summer conditions in some areas. In 2005-06, mutton production is forecast to reach 239 000 tonnes, up slightly on 200405. With little incentive for wool producers to increase sheep numbers and demand on the export markets continuing to expand, slaughter numbers are projected to remain high over the medium term. This is projected to result in mutton production increasing steadily to 263 000 tonnes in 2010-11. A critical factor in the demand for both lamb and mutton over the medium term is competition from other meats. The lamb industry has been able to take advantage of disruptions to trade in beef and chicken caused by outbreaks of BSE (bovine spongiform encephalopathy or ‘mad cow’ disease) and avian influenza in some overseas countries. However, as consumer confidence returns for beef and poultry meat and prices in export markets decline, competition for the consumer dollar will increase.

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australian commodities > vol. 13 no. 1 > march quarter 2006

live sheep

Live sheep exports Following the re-entry of Saudi Arabia into the live sheep trade in July 2005 the number of live sheep exported has increased significantly. In 2005-06 around 4.5 million sheep are forecast to be exported, an increase of around 1 million on the 2004-05 trade and increasing further to around 4.9 million in 2006-07. This is still well below the peak of 6.8 million in 2001. Religious festivals in middle eastern countries mark critical periods for demand and provide an important litmus test for the live sheep trade. For example, from December 2005 through to February 2006, around 600 000 sheep were exported for Hajj, almost double the number last year. Over the medium term live sheep exports are expected to continue to recover ground lost since the disruption to this trade in 2003, and are projected to increase steadily to be around 5.3 million by 2010-11. In 2005-06 one of the key issues facing the live export sector is the sourcing of suitable stock. While this is likely to result in lower exports to Jordan and limit growth in other markets, it is likely to provide some support for prices as the live trade competes with restockers for the available stock.

australian commodities > vol. 13 no. 1 > march quarter 2006

69

contents meat

> Andrew >Dickson Contact> +61 > +61 2 6272 2 6272 2173 ???? >>[email protected] [email protected]

meat outlook to 2010-11 propects for beef and veal, pigs and poultry Frank Drum, Andrew Dickson and John Hogan

> Australian beef production growth and increased supplies in Pacific Rim markets are forecast to result in lower saleyard prices for Australian beef cattle in 2006-07. > Over the medium term, beef cattle prices are forecast to decline further with the assumed re-entry of the United States and Canada into Pacific Rim markets and increased competition in Australia’s key export markets. > Increased competition from major world producers —in key export markets and the domestic market — is expected to lead to lower Australian pig meat prices and a reduction in domestic pig meat production over the medium term. > Australian poultry meat consumption per person is projected to continue to increase over the outlook period, albeit at a lower rate of growth as the prices of other meats ease.

Beef and veal In 1996-97, beef prices in real terms (2005-06 dollars) were at their lowest level for over twenty years (since 1975-76). However, since that time the Australian beef industry has experienced an extraordinary period of growth, driven largely by developments in export markets. With almost two-thirds of Australian beef production exported (in value terms), developments in key export markets — and particularly the United States and Japan — will continue to be critical to the prospects for Australian producers over both the short and medium term. Between 1996-97 and 2001-02, the volume of Australian beef exports increased by almost 25 per cent. Over the same period Australian saleyard prices for cattle increased by almost 80 per cent in real terms. Not surprisingly, Australian beef consumption fell as higher cattle prices were translated into higher retail prices for beef. In 2002-03, cattle saleyard prices declined, reflecting both the impacts of the drought and developments in key export markets, particularly Japan (discussed below). This prompted a relatively quick downturn in Australian consumption. However, with the discovery of BSE (bovine spongiform encephalopathy or ‘mad cow’ disease) in Canada and the United States in 2003, demand for Australian beef in the key export markets of Japan and the Republic of Korea increased significantly, raising cattle prices and dampening growth in domestic demand. Looking forward, the demand for Australian beef on world export markets will continue to be the main driver for Australia’s beef industry. In this context, the outlook for the Asian beef market, in particular, will be critical to Australian producers as over 60 per cent of Australia’s exports are now directed into Asia, as outlined in the boxed section.

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australian commodities

> vol. 13 no. 1 > march quarter 2006

beef

Asian beef markets Asian beef markets have traditionally been the main destination for a significant proportion of beef exported by Pacific Rim producers such as Australia and the United States. Asian markets are particularly important for the Australian beef industry, with the value of exports to Asia accounting for around half to more than 60 per cent of the total value of beef exported over the years 1999 to 2003. Following the discovery of BSE in the United States and Canada in 2003, Australia’s share increased further, to 65 per cent in 2004. Japan and Korea are the primary import markets in Asia, with countries such as Chinese Taipei, Hong Kong and the Philippines importing relatively lower volumes of beef. Over the period 2000–03 Japan and Korea accounted for approximately 80 per cent of all beef imported by Asian countries, while Chinese Taipei, Hong Kong and the Philippines accounted for just 15 per cent. In smaller Asian markets, import growth has been less pronounced than in Japan and Korea, partly reflecting the

greater consumption of lower priced substitute meats. For example, in 2001, buffalo meat accounted for around 79 per cent and 62 per cent of the total volume of beef and buffalo meat imported by Malaysia and the Philippines respectively. While import growth in some other markets has been substantial, the small size of those markets is expected to limit the scope for any significant increase in import volumes over the medium term. Around 90 per cent of all beef imported by Asian countries is usually sourced from the United States, Australia and New Zealand. In 2003, the United States supplied 47 per cent of total beef imports in Asia, while Australia supplied 38 per cent. With the ban on beef imports from north America in 2003, Australia’s share of Asian beef imports rose to 70 per cent in 2004. Singapore, the Philippines and Hong Kong are currently the only Asian countries to import significant quantities of beef from South America.

Value of Australian beef exports, by destination

Asia Japan Korea, Rep. of Chinese Taipei Other Asia Total Share of Australia’s total beef exports (%) North America United States Canada Total Share of Australia’s total beef exports (%) Total exports

1999

2000

2001

2002

2003

2004

$m

$m

$m

$m

$m

$m

1 402 210 125 147 1 884

1 522 244 122 164 2 053

1 740 258 134 187 2 320

1 248 339 153 191 1 931

1 390 272 129 151 1 942

2 261 488 128 127 3 003

62

57

52

47

54

65

827 121 948

1 208 145 1 353

1 715 196 1 911

1 599 318 1 918

1 357 115 1 472

1 411 40 1 451

31

38

43

46

41

31

3 024

3 580

4 493

4 135

3 611

4 630

2000

2001

2002

2003

2004

kt

kt

kt

kt

kt

719 238 61 49 44 22 14 6

674 166 57 47 30 19 14 16 4

487 292 65 53 33 21 16 11 11

576 294 72 55 34 18 16 11 8

432 133 59 51 36 22 15 12 3

1 152

1 028

989

1 084

762

Source: Australian Bureau of Statistics.

Asian beef imports, by country Shipped weight

Japan Korea, Rep. of Chinese Taipei Hong Kong, China Philippines Malaysia Singapore Indonesia China Total Source: Comtrade data, United Nations.

australian commodities > vol. 13 no. 1 > march quarter 2006

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beef

Asian beef markets

continued

Features of the Asian beef trade Approximately 70 per cent of Asian beef imports are traded in frozen form. In the smaller import markets of Chinese Taipei, China, Malaysia, Singapore, the Philippines, Indonesia and Hong Kong, frozen beef typically comprises 90 per cent or more of imports. For Korea the proportion of beef imports that are frozen is similarly high, although the share of chilled beef has been trending upwards. Only in Japan, the largest market in Asia, are significant quantities of chilled beef imported, accounting for around half of total Asian beef imports since 2000. Most Asian markets also have a preference for boneless beef. Among the small Asian markets, the vast majority of imported beef is boneless (typically over 90 per cent) and reflects both the suitability of this product for Asian cuisine and its price, particularly the latter. Frozen imported beef is also well suited to the traditional ‘wet’ markets that are still the prominent way in which beef is sold in the small beef importing countries in Asia. Beef is moved from importers’ cold stores to the wet market where it thaws and is sold, predominantly to the food service sector. Interestingly, even in the small Asian markets most imported beef is eaten away from home. Chinese Taipei, Hong Kong and Singapore also import relatively small quantities of chilled beef, predominantly boneless. This product is imported mainly to supply ‘western’ hotels and restaurants. In common with most Asian countries, Japan imports mainly boneless cuts of beef, both chilled and frozen; more than 99 per cent of Japanese beef imports are boneless. However, in contrast with the rest of Asia, around half of Japan’s imported beef is high valued chilled product. In Japan around 60 per cent of all beef is used in the food service sector (restaurants, cafes and fast food),

while more than 30 per cent is sold in retail outlets for in-home meals. While the Japanese import all cuts from the carcass, cuts from the brisket and ribs as well as from the shoulder and leg (chuck, clod and round), typically account for around three quarters of all imported boneless beef. As price is important in the low end Japanese food service sector, the majority of brisket and rib cuts imported are frozen. The majority of boneless shoulder and leg cuts are traded as chilled product. This reflects their use, not only in higher end restaurants in the food service sector, but also because chilled shoulder and leg cuts are demanded by retail outlets. The Korean market for beef is quite different from those in the rest of Asia. Unlike any other Asian market, the Koreans import significant quantities of beef with the bonein for use in Korean barbeque style dishes; for Korean barbeque ribs it is necessary to leave a piece of bone attached to the meat so it can be clearly identified as rib meat. Typically, bone-in cuts account for around 55 per cent of total Korean beef imports with nearly all of these cuts imported frozen. There has been some expansion of imports of chilled bone-in cuts as well as boneless chilled beef in recent years, albeit from a low base. In Korea around 65 per cent of all beef is used in the food service sector, with the remaining 35 per cent sold in retail outlets. Retail outlets comprise traditional butcher shops — where locally produced beef is predominantly sold — as well as hypermarkets, in which both imported and local beef is marketed. In recent years, consumers have been increasingly purchasing beef from hypermarkets where imported beef is generally thawed and regularly sold at ‘special’ discounted prices.

Share of Asian beef imports, by product type Share of total country imports 2001 Boneless cuts

Japan Korea, Rep. of Chinese Taipei Hong Kong, China Philippines Malaysia Indonesia Singapore China

2003 Bone-in cuts

Boneless cuts

Bone-in cuts

Chilled

Frozen

Chilled

Frozen

Chilled

Frozen

Chilled

Frozen

%

%

%

%

%

%

%

%

47 3 9 5

52 43 83 80 99 57 94 81 90

1 54 7 15 1 36 3 5 2

47 4

52 41

3

1 52

5

81 99

14 1

1

98

1

6 3 13 7

1

1 1

Sources: Agriculture and Livestock Industries Corporation, Monthly Statistics, Japan; World Trade Organisation 2005, Integrated Data Base, Brussels; Korea Meat Trade Association National, Veterinary Research and Quarantine Service (www.kmta.or.kr), 2005.

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australian commodities > vol. 13 no. 1 > march quarter 2006

beef Access to all of the world’s major beef import markets is tightly restricted, either through tariffs and quotas or through sanitary and phytosanitary (SPS) measures. A number of market access liberalisation proposals have been put forward in the context of the current World Trade Organisation (WTO) multilateral trade reform negotiations. Over the medium to longer term liberalisation of market access to major beef import markets will also be critical to the prospects for Australian producers (see the second boxed section). The embargoes on beef from both Canada and the United States in Japan and Korea were lifted in late 2005 and early 2006. Given this, competition in these markets is expected to increase in 2006 and 2007, with Australian beef exports forecast to ease accordingly. This is likely to be the case in both Japan and Korea where demand for Australian beef is expected to fall following the resumption of trade with the United States, which is assumed to commence in earnest in mid-2006. The re-entry of Canadian exports to the US market, traditionally Australia’s largest beef market, coupled with strong competition from Uruguayan beef, is also expected to result in increased pressure in the US market. With Australian saleyard prices forecast to fall over the medium term, Australian exports to the United States are projected to increase to 395 000 tonnes in 2010-11. Importantly, Australia is not expected to fill its allocated quota in the United States before 20010-11. Australian exports to the Canadian beef market are also expected to increase over the projection period to reach pre-2003 levels by 2010-11.

Australian beef exports to Japan reach record levels Japanese beef consumption grew steadily and rapidly from the late 1960s to peak in 2000. Strong growth in consumer demand over this period was supported by a decline in the real retail price of beef, which was being driven down by the strong growth in imports associated with liberalisation of the Japanese beef market. Between 1975 and 2000 retail beef prices in Japan fell in real terms by 20 per cent. Over the same period, imports as a share of total consumption rose from 16 per cent to 67 per cent, peaking at 71 per cent in 2001. That the demand for beef in Japan did not grow more strongly reflects the fact that retail prices for pork and poultry meat also declined significantly over this period, and in fact declined relative to beef. The discovery of BSE in Japan in September 2001 and the discovery of BSE in the United States in December 2003, has resulted in a significant drop in both the demand for beef in Japan and beef imports. While there are positive signs in that the consumption of beef in Japan rose slightly in 2005, the most recent difficulty with a shipment of beef from the United States in January 2006 is likely to reinforce consumer concerns about the disease free status of imported beef. At Retail meat prices, Japan this stage it is difficult to determine whether and how quickly Japanese consumers will regain the ground lost since 2000 Pork and resume the trend increases in beef consumption evident 160 over the past three decades. 140 Immediately following the discovery of BSE in Japan in 2001, beef imports from all suppliers declined markedly. 120 Total beef imports in 2002 were reduced by almost 28 per cent. However, following the exclusion of the United States Beef 100 from the Japanese market in late 2003, Australian beef Chicken 80 exports to Japan quickly bounced back to reach record levels in 2004 and 2005. index 2000 =100 Australian beef export volumes increased by nearly 41 per cent to 393 000 tonnes in 2004, and by another 3 1976 1980 1984 1988 1992 1996 2000 2004 australian commodities > vol. 13 no. 1 > march quarter 2006

73

beef

Global beef trade liberalisation The current pattern of global beef trade is shaped by a combination of market access barriers, disease status and differences in supply competitiveness. Consequently, global beef trade is highly segregated. Brazil, Argentina and Uruguay are currently all excluded from the high value Japanese and Korean markets because of concerns about the presence of foot and mouth disease in these countries. Brazil and Argentina are also excluded from the US and Canadian markets, although Uruguay gained access to these markets in mid-2003. The United States, the European Union, Japan and Korea are the world’s largest beef importers. Together these countries account for about 65 per cent of world beef imports. Australia, the United States, New Zealand, Brazil, Argentina and Uruguay are the world’s largest beef exporters. Brazil, Argentina, Uruguay and Paraguay are also the four members of the South American free trade block referred to as Mercosur (or southern market). The Mercosur countries (excluding Paraguay) together account for around 40 per cent of world beef exports. Brazil and Argentina export primarily to the European Union, the Russian Federation, the Middle East and north Africa, while Uruguay’s main markets are the United States and Canada.

Restricted market access Access to all of the world’s major beef import markets is tightly restricted. The European Union has three tariff quotas for beef — the high quality ‘Hilton’ beef tariff quota that is allocated to specific supplying countries and two global tariff quotas that are open to all suppliers. For beef, the above-quota tariffs range from 76 per cent to 142 per cent in ad valorem equivalent. Currently more than 90 per cent of all EU beef imports are sourced from the Mercosur countries of Brazil, Argentina and Uruguay. These countries not only fill their portions of the ‘Hilton’ quota and most of the other two global tariff quotas, but also export substantial quantities of beef at the high EU above-quota tariffs. This illustrates the significant cost competitiveness of Brazil, Argentina and Uruguay in supplying beef to the European market. The United States has a large tariff quota for beef that is mainly allocated to specific supplying countries such as Australia, New Zealand and Uruguay. Australia and New Zealand have the largest allocation, roughly 387 000 and 213 000 tonnes respectively. Uruguay has an allocation of around 20 000 tonnes. Argentina also has a small allocation but is currently excluded from the US market on the basis of foot and mouth disease restrictions. Imports traded within quota are tariff exempt, while those traded above quota incur a 26.4 per cent ad valorem tariff. Since Uruguay gained access to the US market in the middle of 2003, it has been exporting substantial quanti-

74

ties of beef above their quota, and hence at the abovequota tariff of 26.4 per cent. In 2004, the United States imported 128 000 tonnes of beef from Uruguay, nearly five times more than in the previous year. In the eleven months to November 2005, this trade is estimated to have increased again to 160 000 tonnes. In comparison, Australia and New Zealand rarely export out of quota to the US market. The Japanese and Korean markets are protected by relatively high tariff rates as well as strict disease based access arrangements. Japan currently applies a 38 per cent ad valorem tariff on beef imports, while Korea applies a tariff of 40 per cent.

Market access liberalisation proposals Recently a number of market access liberalisation proposals have been put forward, notably by the United States and the European Union in the context of the World Trade Organisations current multilateral trade reform negotiations (referred to as the Doha Development Round). The United States has proposed large tariff reductions with progressively deeper cuts on higher tariffs. The EU market access proposal contains smaller tariff reductions than the US proposal. Increased market access liberalisation for beef under both the US and EU proposals can be expected to increase the value of world beef trade, with most of the gains expected to arise from reducing high above-quota tariffs in the European Union. Given that Mercosur countries currently export substantial quantities of their beef to the European Union with the high above-quota tariffs, any reduction in the tariffs will reduce the landed price of their beef. Consequently, Mercosur countries are likely to benefit from market access liberalisation in the European Union. Similarly, a reduction in the above-quota tariff in the US market improves the competitiveness of Uruguayan beef as most of their exports are currently incurring the above-quota tariff. If Uruguayan beef could be landed in the United States at even lower prices with an improvement in market access, then exports of Australian beef to that market could be adversely affected. However, Australia and the United States would also gain from improved access to Asian markets, particularly Japan and Korea. The United States is expected to gain more from liberalising the Korean beef market given the preference in Korea for short ribs for use in Korean barbeque. While Australia would be expected to gain in both markets, it is likely to experience the greatest gains from liberalising the Japanese beef market. The continued exclusion of Brazil, Argentina and Uruguay from these two important Asian markets will be an important factor in determining the size of the benefits that accrue to Australia and the United States.

australian commodities > vol. 13 no. 1 > march quarter 2006

beef per cent in 2005. In 2005, around 405 000 tonnes of beef were exported to Japan, with an export value of nearly $2.2 billion. In both 2004 and 2005, Australian exports accounted for between 85 and 90 per cent of total Japanese beef imports. In response to strong demand for Australian beef in Japan, Australian lotfeeders have placed more cattle on feed. The exclusion of US beef from the Japanese market, which accounted for around 45 per cent of total Japanese beef imports in 2003, resulted in a significant increase in demand for Australian grain fed beef in Japan. In 2004, the number of Australian cattle on feed destined for Japan increased by around 27 per cent, to 1.6 million. In 2005 this increased by a further 19 per cent to total 1.9 million.

Beef consumption and imports, Japan 1.4 1.2

Consumption

1.0 0.8 0.6 Imports

0.4 0.2 Mt

1981 1985 1989 1993 1997 2001 2005

Japan–US trade resumption In forecasting export prices and volumes of Australian beef to Japanese beef imports and Australia’s share Japan, assumptions about the resumption of trade between Japan and the United States are critical. 700 On 11 December 2005 Japan and the United States Japanese total imports reached agreement for the United States to resume exports 600 of beef to Japan from cattle 20 months of age and younger. 500 However, on 20 January 2006, Japan reimposed the ban 400 on US beef imports following the discovery of specified risk materials (spinal column) in an airfreight consignment of US 300 veal. While there is still a degree of uncertainty about the 200 Imports from Australia status of the US–Japan trade situation, the current embargo is 100 not expected to be retained for very long. kt In preparing this set of forecasts it is assumed the trade in 1981 1985 1989 1993 1997 2001 2005 beef between the US and Japan will resume by mid-2006. However, given the latest disruption and given Australian producers and exporters are focusing a significant amount of resources toward the Japanese market (such as marketing by Meat and Livestock Australia), it is expected to take a number of years for the United States to regain the market position it held in 2003. Nevertheless, with the re-entry of the United States (and Canada) to the Japanese market, retail prices for beef in Japan are expected to ease. This is also consistent with both the United States and Australia entering a period of increased supplies. Given this, beef consumption in Japan is expected to increase with the majority of this increase expected to flow through to increased import volumes. Reflecting this outlook, Australian beef exports to Japan are forecast to ease in 2005-06, with export prices forecast to decline by around 2 per cent to 325 cents a kilogram. Over the medium term Australian exports to Japan are projected to fall away, to total around 300 million tonnes (shipped weight) by 2010-11.

Republic of Korea In 2004-05, export volumes of Australian beef to Korea, Australia’s third largest export market, increased significantly, largely because of the implementation of bans on imports of US beef in that country. Australian export volumes in 2004-05 were nearly 21 per cent higher than in 2003-04, with record monthly exports of 13 500 tonnes in December 2004. Australian australian commodities > vol. 13 no. 1 > march quarter 2006

75

beef beef exports to Korea continued to increase in 2005 and are forecast to total 95 000 tonnes in 2005-06. However, Korea’s total beef imports have declined significantly since 2003, falling from an estimated 294 000 tonnes to 131 000 tonnes for the year to November 2005. The Korean market for beef is quite different from those in the rest of Asia. Unlike any other Asian market, Korea imports significant quantities of beef with the bone in (and particularly short ribs) for use in Korean barbeque style dishes. Before 2003 the United States accounted for approximately 70 per cent of the Korean beef import market, with over 60 per cent of the trade being in ribs. In contrast, Australia accounted for 21 per cent of the trade, with only 28 per cent of the trade in ribs. With the assumed re-entry of US beef into the Korean market and increased domestic production in 2006, Australian beef exports to Korea are forecast to decline relatively sharply over the short term. In 2005-06, Australian beef exports to Korea are forecast to total 95 000 tonnes (shipped weight). With an increasing population, higher assumed economic growth, and subsequent increased per person income, beef consumption in Korea is expected to trend higher over the outlook period. However, as with Japan, high prices and consumer concerns about the safety of imported beef are expected to dampen the outlook over the medium term. Australian beef exports to Korea are forecast to fall to 82 000 tonnes in 2006-07, largely reflecting the re-entry of the United States to the Korea market. For the remainder of the outlook period, Australian beef exports to Korea are projected to increase modestly, as lower prices improve Australia’s competitiveness.

US cattle herd rebuilding Between January 1996 and January 2004, US cattle numbers fell by around 8 per cent, from 103 million to 95 million. However, with improved seasonal conditions and the implementation of bans on US beef in major export markets, total US cattle slaughter fell in 2004, with cow and heifer slaughter falling by 15 per cent and 7 per cent respectively. As discussed in the latest issue of the US Department of Agriculture’s Livestock, Dairy and Poultry Outlook, the impetus for herd rebuilding has remained strong in 2005, with the reopening of the Japanese market occurring when beef supplies (particularly ‘choice’ beef) are relatively tight. The latest USDA statistics indicate that US cattle numbers increased again during 2005 and are estimated to have reach 97.1 million in January 2006, an increase of around 2 per cent from 2005. With the low point in the cattle cycle now passed, production levels in the United States are expected to increase, gaining momentum toward the end of the outlook period. US cattle inventory The outlook for beef consumption in the United States is relatively modest. According to USDA statistics, the estimated per person consumption of both beef and pork has remained 115 almost unchanged since 1990. However, over the same 110 period, per person consumption of chicken has increased by approximately 40 per cent. Looking forward, an expected 105 easing in beef prices in the United States will provide some support for increased beef consumption. However, consumer 100 concerns about calories, fat and cholesterol, as well as a 95 strong preference for convenience will be equally, if not more important. Given this and that US beef production is expected million to increase over the outlook period, US beef import demand is forecast to moderate. 1981 1986 1991 1996 2001 2006 76

australian commodities > vol. 13 no. 1 > march quarter 2006

beef Competition from South America Another critical factor for Australia is the emergence of south American producers — and Uruguay in particular — as genuine competitors in the US beef import market. In 2003 the United States and Canadian beef markets were reopened to Uruguay following the reinstatement of ‘foot and mouth disease free with vaccination’ status by the Organisation International des Epizooties (OIE). In 2004 the United States imported around 128 000 tonnes of beef from Uruguay, nearly five times more than in the previous year. In the first eleven months of 2005 this trade increased again to an estimated 160 000 tonnes. In both 2004 and 2005, nearly 90 per cent of Uruguay’s beef exports to the United States were subject to a 26.4 per cent above-quota tariff. In comparison, all of Australia’s beef exports to the United States during this period were tariff exempt. Reflecting the current high prices for Australian beef and the rapid penetration of Uruguay into the US market, Australian beef export volumes to the United States are forecast to decline by 13 per cent to 315 000 tonnes in 2005-06, with export prices forecast to average around 290 cents a kilogram. Over the medium term, Australian saleyard prices are projected to ease and Australian exporters will be better placed to compete with Uruguay and Canada at that time. Australian exports to the United States are projected to recover to 395 000 tonnes by 2010-11. Importantly, Australia is not expected to fill its allocated beef quota before 20010-11.

Australian saleyard prices to ease Over the second half of 2005, Australian weighted average saleyard prices increased significantly year on year, as improved seasonal conditions and increased demand from proces-

Beef and veal outlook Unit

Saleyard price a – nominal – real b Cattle numbers c – beef Slaughterings Production Consumption per person Retail price – nominal – real b Export volume d – to United States – to Japan – to Rep. of Korea Export value – nominal – real b Live cattle exports

Ac/kg Ac/kg

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

290

320

325

295

275

260

250

240

million million ’000 kt

306 27.5 24.4 8 779 2 033

329 27.7 24.7 8 853 2 162

325 28.5 25.5 8 505 2 070

288 29.3 26.3 8 675 2 096

262 29.7 26.7 9 050 2 155

241 29.6 26.6 9 250 2 180

226 29.1 26.2 9 520 2 215

212 28.4 25.4 9 835 2 280

kg

37.7

37.0

36.7

36.8

37.0

37.3

37.6

37.8

Ac/kg Ac/kg

1 393

1 449

1 487

1 495

1 500

1 520

1 540

1 560

1 469

1 491

1 487

1 459

1 428

1 411

1 395

1 379

kt kt kt kt

860 361 331 75

948 363 419 91

888 315 390 95

925 340 367 82

930 360 344 81

937 380 308 84

950 385 292 88

985 395 299 91

A$m A$m ’000

3 793 4 000 578

4 584 4 719 550

4 174 4 174 515

4 036 3 937 611

3 892 3 704 645

3 707 3 442 691

3 614 3 274 727

3 597 3 179 756

a Dressed weight equivalent. b In 2005-06 Australian dollars. c At 31 March on establishments with an estimated value of agricultural operations of $5 000 or more in 1998-99, and at 30 June thereafter. d Fresh, chilled and frozen, shipped weight. f ABARE forecast. z ABARE projection. Sources: Department of Agriculture, Fisheries and Forestries; Australian Bureau of Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

77

beef sors, lot feeders and restockers supported higher saleyard prices. For the remainder of 200506, export demand for Australian beef is expected to weaken in Japan and Korea in line with their resumption of trade with the United States. Australian exporters are also expected to face increased competition in the United States market, both from competing exporters (Uruguay and Canada in particular) and domestic US producers. Given these factors, Australian saleyard beef prices are expected to ease in the first half of 2006. Overall, saleyard beef prices are forecast to average 325 cents a kilogram in 2005-06, around 2 per cent above the 2004-05 level. In this context, the timing of when the United States resumes trade with Japan, and how quickly traded volumes increase, is critical. While the United States is not expected to achieve pre-2003 export levels before 2010-11, they are expected to achieve a substantial increase in trade with Japan and Korea in the second half of 2006 and into 2007. As Australian exports to Japan, Korea and the United States are set to come under increasing pressure, exports to other markets, such as Canada, as well as markets in south east Asia are likely to become more important. However, as this switch in export demand away from the high valued Japanese and Korean markets is set to occur as both domestic and US beef supplies increase, Australian saleyard prices are expected to weaken further. Average saleyard beef prices are forecast to fall by 9 per cent to 295 cents a kilogram in 2006-07. Over the medium term, saleyard prices are expected to continue to ease in line with increased supplies and increasingly competitive export markets. In 2010-11, Australian beef saleyard prices are forecast to average 212 cents a kilogram in real terms (2005-06 dollars). One issue that has not been discussed to this point is the potential for Argentina to gain access to the US beef import market. Argentina remains ineligible to ship fresh or frozen beef to the United States because the country has not maintained foot and mouth disease (FMD) free status after a March 2000 outbreak. However, there are growing expectations that Argentina could achieve free status similar to Uruguay as early as 2008. Competition from South American producers in high value FMD-free markets remains a significant risk factor in the medium and longer term outlook for the Australian beef industry.

Cattle numbers to increase until 2006-07 Reflecting improved seasonal conditions in 2005-06 and herd rebuilding efforts (in response to higher prices), Australian cattle numbers have consistently increased since the 2002-03 drought. The Australian cattle herd as at June 2005 was estimated to be approximately 27.7 million. With the continued retention of cows and heifers from slaughter since then, the Australian cattle herd is forecast to continue to increase to 28.5 million by June 2006. However, with prices forecast to ease in late 2006 and into 2007, the impetus for continued herd rebuilding is expected to ease and slaughter rates increase, largely marking an end to the current cycle. Cattle numbers are projected to peak at 29.7 million in June 2008 before easing to 28.4 million by June 2011. Over the medium term, beef production is projected to continue to rise, with the peak in production expected to coincide with the end of the outlook period. Australian beef production is projected to reach almost 2.3 million tonnes in 2010-11.

Live cattle Australia’s live cattle export trade is coming under a large degree of pressure from a variety of sources. These include the appreciation of the Australian dollar (particularly against the US dollar, the Indonesian rupiah and the Philippine peso); strong export demand for Australian beef and hence higher cattle prices; and strong competition from south American beef and 78

australian commodities > vol. 13 no. 1 > march quarter 2006

pigs Indian buffalo meat in south east Asian export markets. These factors have combined to pull Australian live cattle exports back from the record level achieved in 2002-03. In 2004-05, live cattle exports totaled 550 000, at an estimated total value of $333 million. Over the medium term economic growth in south east Asia is projected to moderate from the 4.8–6.4 per cent growth achieved between 2003 and 2005. Nevertheless, growth in this region is still assumed to average between 4.6 and 4.9 per cent a year. With an assumed depreciation of the Australian dollar and reduced cattle prices (reflecting weaker demand for Australian beef in export markets), live cattle exports are forecast to rise over the medium term, reaching 756 000 by 2010-11.

Pigs In 2004-05, Australian pig production declined by around 4 per cent, resulting in an 8 per cent increase in saleyard prices. In the second half of 2005, saleyard prices have continued to remain high, supported by firm domestic demand and a decline in imports. Imports were disrupted in the latter half of 2005 because of uncertainly about the implementation of new quarantine rules for pig meat imports. For the remainder of 2005-06, saleyard prices for pig meat are expected to ease as domestic production and imports increase and prices for other meats also ease. Saleyard prices are forecast to average 240 cents a kilogram. Over the medium term, increased global pig meat production, particularly in north America, is projected to result in lower world, and hence Australian, pig meat saleyard prices.

Feed costs Feed costs represent the largest single expense in Australian pig meat production, accounting for around 50–60 per cent of total costs. Consequently, fluctuations in feed prices are critical to the viability of pig production. In 2004-05, a rise in feed prices and a decline in the prices received for pig meat resulted in the ratio of prices to feed costs falling to its lowest level in a decade. More recently, an excellent winter crop and lower grain prices in Australia in concert with a recovery in saleyard prices have resulted in modest improvement in returns to the industry. However, over the medium term further reductions in saleyard pig prices are expected to more than offset anticipated feed cost reductions, and hence the pig price to feed cost ratio is expected to ease over the outlook period.

Imports growing

Australian trade in pork

Australian pig meat imports have increased significantly in recent years, particularly from Canada and Denmark. Frozen uncooked pig meat from Canada has been allowed into Australia since 1990; with imports arriving after 1992 required to be boned before export and processed on arrival in Australia. In addition, uncooked and boned imports from Denmark have been allowed into Australia since 1997 under similar arrangements. With the most recent changes in quarantine arrangements, the first shipments of pig meat from the United States were received in the latter half of 2004. In 2005, pig meat imports increased by around 23 per cent relative to the previous year. In September 2005, the full federal court ruled that the permits provided to import pig

Monthly, ended December 2005

australian commodities > vol. 13 no. 1 > march quarter 2006

8 6

Imports

4 2 kt –2 –4 –6

Exports

2000

2001

2002

2003

2004

2005 79

poultr y meat were legal as the level of quarantine risk was acceptably low. Pig meat can therefore continue to be imported to Australia under the established quarantine standards. In 2006-07, Australian pig meat imports are forecast to increase by 3 per cent to 72 000 tonnes and over the medium term imports are projected to continue to rise to reach 84 000 tonnes in 201011, 20 per cent above the current estimate for 2005-06.

Australian exports falling The strong Australian dollar and increased competition in key export markets, such as Japan and Singapore, have resulted in Australia’s exports to these markets falling. In 2006-07, Australian pig meat exports are forecast to decline by 5 per cent to 40 000 tonnes. Over the medium term, increased global competition in key Asian markets, particularly from the United States, Canada and Brazil, is expected to result in Australian export volumes declining further over the medium term. In 2010-11, Australia is forecast to export 33 000 tonnes, 21 per cent below forecast 2005-06 levels.

Poultry Outbreaks of high pathogenic avian influenza (HPAI or ‘bird flu’) in Asia have led to the disruption of production and exports from a number of key poultry meat producing nations. In Japan, the world’s second largest poultry meat importer, total chicken meat imports declined by around 16 per cent in 2004 to 582 000 tonnes. In the second half of 2004, Japanese

Australian pig and poultry outlook

Pig meat Breeding sows Saleyard price – nominal – real a Slaughterings Production Consumption per person Imports – fresh – preserved – total Exports b Retail price – nominal – real a Poultry meat Production Consumption per person Exports Retail price – nominal – real a

Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

’000

340

338

335

330

326

323

320

315

Ac/kg Ac/kg

235

253

240

235

230

225

220

210

’000 kt

248 5 591 406

261 5 339 388

240 5 300 380

229 5 200 378

219 5 130 375

209 5 050 370

199 4 990 368

186 4 950 365

kg

22.6

22.1

22.2

22.2

22.2

22.2

22.2

22.3

kt kt kt kt

57.9 2.5 60.4 50.7

79.0 2.5 81.5 43.5

68.0 2.0 70.0 42.0

70.0 2.0 72.0 40.0

72.0 2.0 74.0 38.0

76.0 2.0 78.0 36.0

79.0 2.0 81.0 36.0

82.0 2.0 84.0 33.0

Ac/kg Ac/kg

1 028

1 071

1 103

1 136

1 170

1 205

1 241

1 278

1 084

1 102

1 103

1 108

1 113

1 119

1 124

1 130

kt

732

792

810

825

840

850

865

880

kg kt

34.7 19.8

37.7 19.8

38.0 23.4

38.3 24.0

38.5 25.0

38.5 26.0

38.8 27.0

39.0 28.0

Ac/kg Ac/kg

379

377

382

386

391

397

402

407

400

388

382

377

373

368

364

360

a In 2005-06 Australian dollars. b Excludes preserved pig meat. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; ABARE.

80

australian commodities > vol. 13 no. 1 > march quarter 2006

poultr y poultry meat consumption recovered as high prices for other meats (particularly beef) affected demand for poultry meat. In 2005, Japan’s chicken meat imports are estimated to have increased by around 19 per cent to 695 000 tonnes, consistent with levels prior to the outbreak of Avian influenza in 2003. With the effects of the 2003 outbreak of Avian flu dissipating, production in key poultry producing nations, such as Thailand and Malaysia, are now returning to levels consistent with those prior to the outbreak. Nevertheless, the potential for further outbreaks of Avian flu remains an important risk factor in the outlook for chicken meat, and indeed for all the meats. Increased production by Thailand and Malaysia, in addition to increased production in Brazil, the world’s largest poultry meat exporter, is expected to significantly increase competition in the key Asian import markets. However, with low feed costs (and an assumed modest easing in the Australian exchange rate), Australian exports of chicken meat are forecast to increase over the short term. In 2005-06, poultry meat exports are forecast to increase to 23 400 tonnes, and continue to increase, reaching 28 000 tonnes in 2010-11. In Australia, forecast lower feed grain prices are expected to contribute to higher domestic poultry production in the short term. For 2005-06, production is forecast to increase to 810 000 tonnes, increasing by 9 per cent to 880 000 tonnes by 2010-11. Over the medium term, increased poultry production will continue to be driven by firm demand (both in domestic and export markets) and reduced feed costs. Australian poultry meat consumption is projected to increase moderately to 39 kilograms per person by 2010-11, around 2.6 per cent higher than in 2005-06.

australian commodities > vol. 13 no. 1 > march quarter 2006

81

contents dair y

> John > Contact Hogan >> +61 +61 22 6272 6272 2056 ???? >> [email protected] [email protected]

dairy outlook to 2010-11 world prices falling as exports grow Robert Delforce and John Hogan

> World prices for dairy products are projected to ease in real terms over the medium term as world exports grow faster than import demand. > Australian milk production is projected to grow modestly over the next five years as a result of a steady improvement in average milk yields per cow.

Prices easing in 2006 World prices for the major dairy products eased in the latter part of 2005 following two years of significant rises. High prices in 2003-04 and 2004-05 were the result of reduced supply in major dairy exporting countries at a time of rising demand for dairy products. World supplies were eroded over this period as persistent poor seasonal conditions prevailed in Australia and New Zealand, and as growth in EU milk production was limited (reflecting the supply quotas under the Common Agricultural Policy). Dairy product demand in key markets such as south east Asia, the Russian Federation, Middle East and north Africa increased significantly as a result of strong economic growth and increased oil revenues. World dairy supply in the first half of 2005-06 increased with improved seasonal conditions in Australia and increased production in the United States and the new member states of the European Union. Moreover, competition in international dairy markets increased through rising exports from emerging exporters such as Argentina, China and the Ukraine. As a result, world dairy product prices for butter, cheese and whole milk powder (WMP) eased in late 2005.

World dairy product prices

Prices to fall in real terms over the medium term

Monthly, ended January 2006 Cheese

2500

Whole milk powder

2000 Skim milk powder

1500 Butter

1000 2005

US$/t Dec

82

2003

Dec

2004

Dec

2005

Dec

Over the medium term to 2010-11, demand for dairy products is expected to remain strong, with firm economic growth projected for all major importers of dairy products. However, projected increases in production in major exporting countries such as Australia, New Zealand, the European Union and Argentina are expected to put downward pressure on world dairy product prices over the next five years. The further development of the dairy industries of China, India and the Ukraine is also expected to reinforce the trend of increasing world supplies and falling dairy product prices. Under these circumstances, a major challenge facing the Australian dairy industry will be its ability to maintain competitiveness in export markets. Farm consolidation and australian commodities

> vol. 13 no. 1 > march quarter 2006

dair y enhanced productivity will be key factors in shaping the industry’s longer term export competitiveness (discussed in more detail later).

World consumption rising Total world consumption of milk and processed dairy products has continued to rise steadily over recent years. For example, between 2000 and 2005, total annual world fluid milk consumption rose by over 8 per cent to 163 million tonnes. In the emerging markets of China and India, fluid milk consumption is estimated to have increased 240 per cent and nearly 20 per cent respectively over the same period, albeit from relatively low bases. For major dairy products, total world butter consumption increased by 21 per cent between 2000 and 2005, WMP by 17 per cent and cheese and skim milk powder (SMP) by 12 per cent. Most of these increases stemmed from increased consumption in China, India, the Russian Federation and the Ukraine. In the case of milk powders, per person consumption of WMP in China is estimated to have doubled from 0.4 to 0.8 kilograms a year. For butter, consumption is estimated to have increased from 2.0 to 2.8 kilograms per person in India and from 2.2 to 2.8 kilograms per person in the Russian Federation and the Ukraine. In comparison, annual per person consumption of butter in the United States and the European Union was largely unchanged between 2000 and 2005; total US and EU consumption increased by around 6 per cent and 3 per cent respectively, reflecting population growth. Annual per person cheese consumption in the Russian Federation and the Ukraine is estimated to have doubled between 2000 and 2005, increasing from 1.7 to 3.5 kilograms a year. This compares with increases in per person cheese consumption in the major dairy consuming markets of the United States and the European Union of just 7 per cent and 9 per cent respectively. Continued strong economic development in China and India along with rapidly changing consumer preferences is forecast to promote further increases in the demand for milk and dairy products over the next five years. With incomes also expected to rise in all the major dairy consuming countries over the medium Per person consumption of selected dairy products term, moderate increases in total world Russian demand are expected through to 2010-11.

Expanding world milk production World cow milk production rose by 2.4 per cent in 2005 to around 414 million tonnes, primarily the result of a 24 per cent increase in production in China. This followed a 1.8 per cent rise in world milk production in 2004. Among the major dairy exporters, production rose by around 0.5 per cent in the European Union and Australia but fell by 4 per cent in New Zealand. Medium term increases in world milk production are projected to be underpinned by further expansion of the Chinese, Indian and Argentine dairy industries. It is also assumed that average seasonal conditions will prevail in Australia and New Zealand

China

India

Federation, Ukraine

United States

European Union 25

Cheese 2000 2005 Change

kg kg %

– – –

– – –

1.7 3.5 105.9

13.6 14.5 6.6

12.2 13.3 9.0

Butter 2000 2005 Change

kg kg %

– – –

2.0 2.8 40.0

2.2 2.8 27.3

2.1 2.1 0.0

4.2 4.2 0.0

Whole milk powder 2000 kg 0.4 2005 kg 0.8 Change % 100.0

– – –

0.5 0.6 20.0

0.14 0.60 328.6

1.0 0.8 –20.0

0.2 0.3 50.0

0.7 0.9 28.6

1.2 2.1 75.0

2.4 2.0 –16.7

Skim milk powder 2000 kg 2005 kg Change %

0.1 0.1 0.0

Source: US Department of Agriculture.

australian commodities > vol. 13 no. 1 > march quarter 2006

83

dair y from 2006. Reflecting this, production is expected to gradually increase from the low levels experienced since the 2002-03 drought in Australia and during the unfavorable wet and cold conditions in New Zealand in 2005.

Limited growth in dairy product exports World dairy exports 1600 Whole milk powder

1400

Cheese

1200 1000

Skim milk powder

800 Butter

600 kt 2001

2003

2005

World outlook for the major dairy products

World dairy product prices Annual Whole milk powder

2500

Cheese

2000 Butter

1500 Skim milk powder 1000 2005-06

US$/t

1995 -96

1998 -99

2001 -02

The mix of world dairy exports has changed in recent years as exporters have sought to exploit differentials in the prices of major dairy products. For instance, from 2003 to 2005 total world exports of cheese and WMP rose by 6 per cent, while butter and SMP exports fell more than 5 per cent and 8 per cent respectively. Over the medium term, growth in world dairy product exports is expected to be relatively modest. Low stocks in the United States and European Union and limited quota increases in the European Union are likely to constrain export supply growth for dairy products for a number of years. Moreover, increasing production in China, Mexico and Brazil is expected to displace some current imports to these important markets.

2004 -05

2007 -08

2010 -11

Cheese consumption and imports Russian Japan Federation

World prices for dairy products rose strongly in 2003-04 and 2004-05, as a result of rising demand and falling supplies of dairy products available for export. Between 2002-03 and 2004-05 the world indicator price for butter increased by 86 per cent, cheese 58 per cent, WMP 41 per cent and SMP 39 per cent. However, increased world dairy supplies and easing growth in world import demand resulted in world dairy product prices falling in the first half of 2005-06. Between 2005-06 and 2010-11, world prices for the main dairy commodities are projected to fall in real terms by as much as 25 per cent as growth in export supplies outstrip import demand. Such prices would be broadly similar to longer term trends — although significant year to year volatility will remain a feature of the world dairy market. Across the different dairy commodities, a range of specific factors are expected to determine the future prospects for each market. Cheese

Korea, Rep. of

Mexico

Consumption 2000 2005 Change

kt kt %

239 252 5.4

275 560 103.6

43 66 53.5

188 219 16.5

Imports 2000 2005 Change

kt kt %

205 215 4.9

60 215 258.3

30 43 43.3

54 85 57.4

Source: US Department of Agriculture.

84

Sharply rising world cheese prices during 2003-04 and 2004-05 were primarily the result of increased cheese consumption and import demand in Japan, the Russian Federation, Mexico and Korea. Consistently accounting for about a fifth of total world cheese imports, Japanese import demand has historically been a key driving factor in world cheese trade. However, since 2000, Russian cheese imports rose to such an extent that in 2005 the Russian Federation australian commodities > vol. 13 no. 1 > march quarter 2006

dair y equalled Japan in importance as a cheese importer (in volume terms). This reflects a 100 per cent increase in cheese consumption in the Russian Federation over a period when domestic production increased by only 60 per cent. Over this period Mexico and Korea also became important players in the world cheese market, increasing their respective imports by 57 per cent and 43 per cent since 2000 to collectively account for over 13 per cent of total world cheese imports in 2005. In reaction to the strong growth in demand for cheese, major world producers responded with significant increases in production occurring in Argentina, the Ukraine and Australia in 2005. Beyond 2006, ongoing growth in cheese exports from these countries is forecast to lead to an easing in cheese prices over the medium term. From a forecast average price of around US$2800 a tonne in 2005-06, world cheese prices are projected to fall by 25 per cent in real terms to US$2110 a tonne in 2010-11.

Dairy outlook Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

US$/t US$/t

1 621 1 724

2 209 2 281

2 054 2 054

2 000 1 946

1 940 1 847

1 875 1 750

1 800 1 647

1 750 1 570

US$/t US$/t

1 862 1 981

2 211 2 283

2 200 2 200

2 180 2 122

2 140 2 037

2 085 1 946

2 015 1 843

1 920 1 722

US$/t US$/t

2 358 2 509

2 803 2 895

2 800 2 800

2 750 2 676

2 635 2 508

2 535 2 366

2 430 2 223

2 350 2 108

’000 L

2 005 5 025

2 005 5 050

2 006 5 110

2 007 5 162

2 009 5 212

2 010 5 269

2 011 5 318

2 014 5 365

ML ML ML

10 075 1 992 8 083

10 125 2 022 8 103

10 250 2 078 8 172

10 360 2 131 8 229

10 470 2 200 8 270

10 590 2 264 8 326

10 695 2 336 8 359

10 805 2 404 8 401

kt kt kt kt

149 384 184 187

147 386 189 189

147 391 183 191

142 400 170 200

138 410 162 202

136 418 156 206

131 429 145 209

126 440 137 211

Ac/L Ac/L

27.9 29.4

31.0 31.9

33.0 33.0

33.1 32.3

33.1 31.5

33.2 30.8

33.2 30.1

33.0 29.2

kt kt kt kt

83 212 155 117

69 227 141 105

70 232 154 126

70 236 139 144

65 238 138 145

56 238 123 159

50 240 112 162

45 242 102 163

A$m A$m

2 210 2 330

2 418 2 489

2 597 2 597

2 614 2 550

2 618 2 492

2 633 2 445

2 624 2 377

2 590 2 289

World Indicative price Butter – nominal – real a Skim milk powder – nominal – real a Cheese – nominal – real a

Australia Cow numbers b Yield per cow Production Total milk Milk sales Manufacturing usage Butter c Cheese Skim milk powder Wholemilk powder Milk price d – nominal d – real e Export volume Butter c Cheese Skim milk powder Wholemilk powder Export value – nominal – real e

a In 2005-06 US dollars. b At 30 June on establishments with an estimated value of agricultural operations of $5 000 or more. c Includes the butter equivalent of butteroil, butter concentrate, ghee and dry butterfat. d Includes freight from farm gate to processor in some states. e In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Dairy Australia; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

85

dair y Whole milk powder

Increased world prices for WMP in 2003-04 and 2004-05 were mainly the result of increased import demand from Algeria and China — imports were up 39 per cent and 18 per cent respectively between 2002 and 2004. Algerian demand has risen steadily in line with increases in oil revenues to a point where, in 2004 and 2005, it accounted for 35 per cent of total world WMP imports (up from 24 per cent in 2000). Increased import demand in China reflects rising average annual incomes, greater government recognition and promotion of the health benefits of milk, as well as the increased exposure of consumers to western and international cuisines. Total WMP consumption in China is estimated to have increased by 70 per cent between 2000 and 2005, increasing from 563 000 to 956 000 tonnes. Future growth in the demand for WMP is expected to be underpinned by a significant shift in demand in China, Chinese Taipei and Peru away from the commercial reconstitution of SMP in large plants toward decentralised use of WMP. This shift toward WMP reflects the greater reconstitution flexibility of WMP and advances in packaging technology that enables WMP to retain its flavor longer. However, there is a degree of uncertainty over the medium term resilience of WMP prices. Ongoing growth in WMP production in China and India is expected to displace some supplies to these important export markets over the medium term. Moreover, the potential exists for both China and India to generate additional exportable surpluses that could have a further impact on future world WMP demand and prices. From a forecast average price of US$2220 a tonne in 2005-06, world WMP prices are projected to fall by 19 per cent in real terms to under US$1800 a tonne in 2010-11. Butter

World butter prices increased in 2003-04 and 2004-05 as import demand grew strongly in both north America and the Russian Federation. Between 2002 and 2004, import volumes rose by 42–47 per cent in Canada, Mexico, the United States and the Russian Federation. Some support for butter prices is being provided by increased demand for butteroil, used for cooking purposes, in the Middle East, reflecting the impact of increased oil revenues. However, increases in north American butter production and a fall in butter consumption in the Russian Federation in the first half of 2005-06 reduced total world import demand over that period. At the same time, butter export volumes increased during seasonal production peaks in Oceania, and EU exporters took advantage of a world price that exceeded EU CAP butter intervention prices to sell down butter stocks. Together, these factors led to an easing of international butter prices during October to December 2005. World butter prices are forecast to decline steadily over the medium term (in real terms) with further falls expected in north American and Baltic import demand, and small increases in supplies anticipated in Australia, New Zealand, the Ukraine and India. From a forecast average price of US$2050 a tonne in 2005-06, the world price of butter is projected to fall by 23 per cent in real terms to US$1570 a tonne in 2010-11. Anticipated increases in butter production and exports from India over the next five years illustrate the emergence of India as an important low cost world dairy producer. Indian butter production has expanded rapidly over the past decade — providing a small 10 000 tonnes exportable butter surplus in 2005. India’s growing presence in export markets in future years is expected to add further downward pressure to prices and comes in addition to the projected increases in butter production in the Ukraine, Australia and New Zealand. However, a key determinant of India’s future influence in world dairy export markets will be the capacity of its dairy industry to deliver real increases in milk yields per cow. While 86

australian commodities > vol. 13 no. 1 > march quarter 2006

dair y India was able to build its national dairy herd by over 6 per cent between 2000 and 2005, average milk yields were constant at 1000 litres a year. This is extremely low compared with a world average of 3300 litres a year per cow and is indicative of the current small scale and inefficient nature of the Indian dairy production system. Skim milk powder

Increases in imports of SMP during 2003-04 and 2004-05 occurred mainly in Mexico (with imports up 27 per cent on 2002 levels), China (up 57 per cent), the Philippines (up 30 per cent) and Indonesia (up 23 per cent). Together these four countries increased total SMP imports by nearly 30 per cent from 377 000 tonnes in 2002 to 488 000 tonnes in 2005. Over the same period, total supplies of dairy products available for export fell as major SMP exporting countries directed a higher proportion of milk output toward higher priced cheese and WMP products. The deficit in available SMP supplies was met through a rundown in US and EU SMP stocks — with US stocks being depleted by 88 per cent and EU stocks almost exhausted. The depleted SMP stocks in the United States and the European Union and slower than expected recovery in Oceania dairy production are now expected to support world SMP prices in 2006 and into the medium term. Counterbalancing this is the significant shift in milk powder import demand in China, Taiwan and Peru away from SMP to WMP, as discussed earlier. The imposition of new national labeling regulations in China in 2005 also has the potential to weaken demand for reconstituted skim milk products, particularly for SMP that is reconstituted into infant formulas. Infant formula labels are now required to contain information on the lower nutritional content of SMP based formulations compared with WMP formulas. As a result of these developments, total SMP imports into China fell 10 per cent in 2005 and are forecast to fall a further 5 per cent in 2006. From a forecast average price of US$2200 a tonne in 2005-06, the world SMP price is projected to fall by 22 per cent in real terms to US$1720 a tonne in 2010-11.

Potential impacts of changes to EU CAP arrangements Since 2000 the European Union has consistently accounted for 47 per cent of world cheese production, over 30 per cent of world butter and SMP production and more than 25 per cent of WMP output. At these volumes, even moderate increases in EU output can seriously affect trade balances and prices in major dairy export markets. EU milk and processed product output is forecast to increase in the medium term as dairy producers in new member states progressively meet stringent EU milk quality standards, and their output is absorbed into EU production and export quotas. However, changes to EU CAP arrangements are expected to limit the size of any increase in total annual EU milk output over the outlook period. For example, from July 2005, EU support prices for butter and SMP were reduced by 7 and 5 per cent respectively. Also, the butter intervention ceiling is being progressively wound back by 10 000 tonnes a year from 70 000 tonnes in 2004-05 to 30 000 tonnes in 2008-09.

Prospects and challenges for Australia The Australian dairy industry relies heavily on export markets — exporting between 50 and 85 per cent of the dairy products produced in 2005-06. Maintaining competitiveness in major export markets is therefore a critical challenge for the Australian dairy industry. The competitive imperative for lower cost, more efficient dairy production systems and operations — brought into sharp focus by the widespread drought of 2002-03 — has been a primary factor in the changing nature of the Australian dairy industry. Improvements in competitiveness have come through production cost containment and productivity gains australian commodities > vol. 13 no. 1 > march quarter 2006

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dair y through farm size consolidation, more intensive farming systems, the adoption of supplementary feeding regimes, advanced breeding genetics, and the development and marketing of higher value (value added) manufactured products. These trends can be expected to continue, thus enabling the industry to remain competitive and profitable in the face of longer term declines in dairy product prices in real (net of inflation) terms.

Medium term outlook for Australia Total Australian milk production is projected to increase by 7 per cent from 10.1 billion litres in 2004-05 to more than 10.8 billion litres in 2010-11. The progressive consolidation of farms into larger production units is likely to lead to increases in yields and the size of the total dairy cow herd over time. However, these factors are not expected to be sufficient to return milk production to the pre-drought level of around 11.3 billion litres a year. Higher Australian milk production, and therefore manufactured product volumes, over the medium term will stem from the combined effects of a slight rise in the national dairy herd and a projected 5 per cent increase in milk yields between 2005-06 and 2010-11. The trend toward more intensive dairy production systems — particularly the greater use of supplementary feeding of herds together with the economies of scale associated with increasing average farm herd size — are expected to be the main factors driving projected increases in average milk yields. With cheese prices projected to be relatively more attractive than prices for other dairy products over the medium term — largely as a result of firm import demand in Asia, Brazil and the Russian Federation — cheese (and to a lesser extent WMP) production is expected to be the increasing focus of growth in manufactured dairy products and Australian dairy exports over the next few years. Overall, the total value of Australian dairy product exports is projected to fall by 11 per cent between 2005-06 and 2010-11 to $2.3 billion in real terms (2005-06 dollars). The assumed depreciation of the Australian dollar against the US dollar over the period is expected to limit the impact on Australian dairy export earnings from the projected fall in real world dairy product prices (which are expressed in US dollar terms) over the period.

88

australian commodities > vol. 13 no. 1 > march quarter 2006

contents energy

> Jammie 2 6272 > [email protected] Contact Penm > +61>2+61 6272 ???? 2030 > [email protected]

energy outlook to 2011 high energy prices to ease in the medium term Stuart Kinsella, William Mollard, Lachlan Smirl, Robert Curtotti and Jammie Penm

> World oil prices are forecast to remain high in the next few years, reflecting continued growth in consumption and relatively modest increases in production. Toward the end of the outlook period, global oil prices are projected to decline more significantly in real terms, mainly as a result of substantially higher world production and production capacity by that time. > World U3O8 prices are expected to increase in 2006, supported by further reductions in stocks of uranium. From 2007, a substantial forecast increase in U3O8 production, particularly in Canada and Kazakhstan, is expected to slow the rate of drawdown in uranium stocks. As a result, real U3O8 prices are expected to ease slowly toward 2011. > Downward pressure is expected on thermal coal prices in the short term, as exports from major producers are forecast to increase. Over the medium term, production capacity expansions will support growth in Australian thermal coal exports.

Energy prices World prices for energy commodities were driven higher in 2005, with a significant rise especially for crude oil. Continued strong world economic growth has translated into higher demand for transport fuels, electricity and petrochemical inputs, leading to a significant increase in consumption of crude oil, coal, LNG and uranium. In the short term, different price movements are forecast for energy commodities on world markets. While oil and gas prices are forecast to remain high, downward pressure on World energy commodity prices In 2006 US dollars the prices for thermal coal is expected. For uranium, prices are likely to continue their recent upward trend. While growth Oil in demand is generally forecast to remain strong, the different 200 Uranium price forecasts mainly reflect the expected supply situations of different energy commodities. LNG 150 Over the outlook period to 2011, growth in demand is projected to ease gradually from the strong pace in recent years, as world economic growth is assumed to moderate to 100 a level that is more sustainable on a longer term basis. Coal 50 In response to recent high prices, investment in the energy sector is set to increase markedly, leading to a more significant expansion in world production and production capacity. index 1996=100 1996 1998 2000 2002 2004 2006 This is likely to lead to a buildup in stocks and diminishing australian commodities > vol. 13 no. 1 > march quarter 2006

89

oil concerns about supply and spare production capacity, which will place some downward pressure on prices. However, until production capacity rises sufficiently toward the end of the projection period, prices, especially for oil and gas, are likely to remain relatively high for a number of years.

Oil Price projections overview World oil prices averaged around US$57 a barrel in West Texas Intermediate terms in 2005, a rise of around 36 per cent on 2004. Prices were driven higher by a combination of demand and supply factors. While strong demand continued in many world economies, including China, Japan and many other Asian countries, supply disruptions, partly as a result of hurricane activity in the Gulf of Mexico, placed significant upward pressure on prices. After reaching a high of US$70 a barrel in September 2005, WTI oil prices declined to around US$58 a barrel in November as a result of oil production gradually recovering in the Gulf of Mexico region. In early 2006, world oil prices rose once again to around US$68 a barrel in response to an increase in geopolitical tensions in Iran and production disruptions in Nigeria as a result of militant attacks on oil facilities. Looking forward, global oil prices are forecast to remain high in 2006 (averaging around US$60 a barrel in WTI terms), before a marginal reduction in 2007 (averaging US$57 a barrel). The forecast of relatively high oil prices in the remainder of 2006 is underpinned by expected strong growth in consumption and only a relatively modest increase in world oil production. World oil prices are forecast to average lower in 2007, mainly as a result of expected larger increases in both world oil production and spare production capacity by that time. Reflecting an assumed easing of world economic growth, growth in oil demand is also forecast to moderate in 2007. Beyond the short term, there is a distinct possibility that world oil prices could remain relatively high for a number of years. Because world oil production is not expected to increase rapidly, a sharp reduction in world oil prices appears unlikely when growth in demand is projected to remain at a relatively strong pace.

Increased Iran US oil imports resumes nuclear Hurricane program Rita

Crude oil prices West Texas Intermediate price, weekly, ended 29 January 2006 65 60

Strikes in Nigeria

55

Saudia Arabia increases output

50

OPEC announces lower output

45 40 35

Yukos announces potential bankruptcy

30

US$/bbl Jan

90

Hurricane Ivan

Mar

May July 2004

Decline in US heating stocks

Death of US refinery explosion Saudi king Iraq closes Increased northern pipeline Hurricane US oil stocks Katrina Iraq reduces Disruption output US in Nigeria Increased refinery US oil stocks fire Hurricane Dennis OPEC announces increased production

OPEC announces lower output

Sept

Nov

Jan

Mar

May July 2005

Sept

Nov

Jan

australian commodities > vol. 13 no. 1 > march quarter 2006

oil Toward the end of the projection period, world oil prices, in 2006 dollar terms, are projected to decline more quickly in response to higher global oil production and a substantial increase in oil stocks by that time. In real terms, the price for WTI crude is projected to average around US$39 a barrel in 2011. If high and volatile oil prices were to continue into the medium term, it is likely that more resources would be devoted to research, development and production of fuels from sources other than crude oil. A combination of higher fuel prices and technological advancements will make the production of alternative fuels more economical over the medium term. Increased availability and production of alternative fuels would, in turn, constrain upward pressure on world crude oil prices.

Relatively high oil prices in the short term The assessment of relatively high oil prices in the short term is supported by a number of important market factors. Underpinned by assumed strong world economic growth, world oil consumption is forecast to increase by 2.2 per cent in 2006 and 1.9 per cent in 2007. World oil production is forecast to increase at slightly higher rates in the next two years, leading to a slow increase in world oil stocks. While world oil prices (in WTI terms) are forecast to average around US$60 a barrel in 2006, considerable uncertainty remains in the short term outlook for oil price movements. Although new projects in both OPEC and non-OPEC countries are expected to increase world production, continued growth in demand and relatively low spare capacity in both crude oil production and refining could place significant upward pressure on prices, especially if large and unexpected supply disruptions were to occur.

Volatility in price movements to continue Movements in world oil prices over the past few years have been particularly sensitive to market perceptions about actual and potential supply disruptions and changes in spare production capacity. There has been a strong relationship between the increase in world oil prices and a decline in spare oil production capacity in recent years. Relatively low spare production capacity means that the volatility in world oil prices experienced recently is likely to continue. Because of relatively low spare production capacity, world oil prices have become particularly sensitive to disruptions to production and unexpected increases in consumption. Disruptions to production can arise from labor strikes, geopolitical tensions and unfavorable seasonal conditions, such as hurricane activity, in oil producing regions. Unexpected consumpWTI vs OPEC spare production capacity tion increases are often associated with higher demand for Monthly, ended December 2005 heating and fuel oil in severe winter conditions and stronger demand for petrol in the driving season, which is especially Average spare capacity 70 6 the case in north America. WTI 60 5 During 2005, OPEC’s production capacity is estimated to have increased by close to 1 million barrels a day. This 50 4 increase was underpinned by projects completed in 2004, 40 3 as well as those undertaken during 2005. In 2005, OPEC committed new investment of around US$20 billion to expand 30 2 production. Of these new projects, the majority will produce 20 1 ‘light’ quality crude — that is, crude with a relatively high American Petroleum Institute (API) gravity. Light crude oils are US$/bbl Mbbl/day typically defined as those with an API gravity higher than 33 Dec Dec Dec Dec degrees. 2002 2003 2004 2005 australian commodities > vol. 13 no. 1 > march quarter 2006

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oil OPEC’s production capacity is forecast to increase further by 1.0 million barrels a day in 2006. Capacity expansion is expected in many member countries, including Algeria, Libya, Nigeria, Saudi Arabia and the United Arab Emirates. In addition to ongoing redevelopment and complementary infrastructure projects, there are plans for additional new investment of around US$15 billion in 2006. The crude quality of these new projects will be mostly light with a lower content of sulfur (so-called ‘sweet’ crude).

Non-OPEC production has risen markedly Over the past few years, a significant proportion of the increase in world oil production has come from non-OPEC producers, especially those in the non-OECD region. Producers that have contributed significantly to this increased production include the Russian Federation and countries in Africa, the Caspian Sea region and Latin America. In 2005, disruptions, such as unplanned shutdowns, hurricane activity in the Gulf of Mexico and industrial actions, have led to non-OPEC production remaining largely unchanged. Under the assumption of average seasonal conditions, production in non-OPEC countries is forecast to increase in 2006 and 2007. Despite continued declines in mature fields in the North Sea and Mexico and slower growth in the Russian Federation, increased output in existing and new projects are forecast to lead to higher production in Canada, Angola and Brazil in the next few years. Recent global oil industry surveys indicate that there has been an increase in exploration expenditure and investment spending on production facilities worldwide. For non-OPEC producers, expenditures on drilling and well completion are estimated to have increased by around 20 per cent in 2005. In response to continued high oil prices, exploration and investment spending is expected to rise by a further 15 per cent in 2006. Deepwater projects have taken a growing share in new investment.

Production recovery from hurricane activity The forecast rise in non-OPEC oil production in 2006 also reflects a continued recovery of crude oil production in the Gulf of Mexico from the disruptions caused by hurricanes Katrina and Rita in August and September 2005. In early 2006, around 25 per cent and 17 per cent of normal daily oil and gas production respectively remained shut-in in the Gulf of Mexico. For refining, one refinery in New Orleans was out of service and many were operating below normal capacity.

Uncertainty about exports from Iran There have been considerable market concerns about the proposal by the United States and European countries, including Germany, France and the United Kingdom, to refer Iran to the United Nations Security Council for possible sanctions if Iran continues with its nuclear program. Iran is the second largest producer in OPEC, with output of around 3.85 million barrels a day, which accounts for around 13 per cent of total OPEC production. A sharp reduction in oil exports from Iran, if it were to occur, could place significant upward pressure on world oil prices.

Concerns about world refining capacity There are growing concerns in the marketplace that a lack of spare oil refining capacity has the potential to increase upward pressure on retail prices for petrol and petroleum products. In 2005, disruptions to refineries in the Gulf of Mexico area and the North Sea region adversely affected sentiment in world oil markets, adding volatility to oil price movements. 92

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oil Utilisation rates of refineries have been high in recent years as a result of strong growth in demand for petrol and petroleum products. In late December 2005, the utilisation rate was around 94 per cent and 90 per cent respectively in Japan and western Europe. Reflecting continued disruption in the Gulf of Mexico region, the utilisation rate was slightly below 90 per cent in the United States. In the United States, the number of operable refineries declined from 324 in 1981 to 148 in 2005. In response to increased demand, the remaining refineries have either expanded production capacity or increased the rates of utilisation. Higher utilisation has led to some refineries undertaking unplanned maintenance to avoid breakdowns. While financial and environmental considerations make it unlikely that new refineries will be built in the United

Oil and gas outlook a Unit

2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

83.0 82.2

84.1 83.3

86.4 85.1

88.9 86.7

90.2 88.1

91.3 89.6

92.4 91.0

93.5 92.5

34.41 36.60

49.57 51.06

53.24 53.24

49.94 48.72

45.46 43.48

41.80 39.20

38.33 35.23

37.48 33.78

41.43 44.07

56.55 58.24

59.69 59.69

57.41 56.00

52.17 49.90

48.15 45.15

44.09 40.53

43.14 38.88

2003 -04

2004 -05

ML 27 876 ML 17 526

25 364 15 731

26 896 16 821

28 279 19 557

32 250 24 856

31 297 24 146

30 865 23 850

29 016 22 470

A$m 5 055 A$m 5 331 ML 23 498

6 330 6 517 26 054

8 549 8 549 24 576

9 271 9 045 27 059

11 323 10 777 28 792

10 469 9 722 29 241

9 765 8 846 29 584

8 798 7 776 30 261

World mbd Production mbd Consumption Trade weighted crude oil price b – nominal US$/bbl – real c US$/bbl West Texas Intermediate crude oil – nominal US$/bbl – real c US$/bbl

price

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

Australia Crude oil and condensate Production Export volume Export value – nominal – real d Imports Natural gas Production LNG export volume LNG export value – nominal – real d LPG Production e Export volume Export value – nominal – real d Petroleum products Refinery production Other g Exports h Imports Consumption – total net i

Gm3 Mt

37.0 7.9

41.2 10.6

45.7 13.1

49.2 15.3

53.1 15.3

61.2 17.0

65.3 19.3

68.1 19.9

A$m A$m

2 174 2 293

3 199 3 293

5 002 5 002

6 111 5 962

6 188 5 890

6 755 6 272

7 243 6 562

7 275 6 430

ML ML

4 639 2 916

4 625 2 844

4 643 3 000

4 667 3 230

4 860 3 440

5 157 3 560

5 245 3 730

5 340 3 925

A$m A$m

647 683

804 828

1 033 1 033

1 124 1 096

1 137 1 082

1 134 1 053

1 209 1 095

1 296 1 146

ML 39 185 ML 5 653

40 202 4 366

39 179 5 622

40 571 5 640

40 362 6 970

40 564 7 753

40 767 8 405

40 971 9 119

2 474

1 847

1 922

2 015

2 176

2 149

2 103

1 982

ML 10 542

ML

11 188

12 108

11 800

11 922

12 003

12 232

12 413

ML 52 906

53 909

54 987

55 995

57 078

58 171

59 301

60 521

a One megalitre a year equals about 17.2 barrels a day. b Official sales prices or estimated contract terms for major internationally traded crude oils. c In 2006 US dollars. d In 2005-06 Australian dollars. e Primary products sold as LPG. g Refinery swells and losses, stock changes, petrochemical byproducts and naturally occurring LPG for domestic consumption. h Excludes LPG. i Liquid petroleum products including refinery fuel, feedstocks and losses, and international ships and aircraft stores. f ABARE forecast. z ABARE projection. Sources: Energy Information Administration (US Department of Energy); ABARE.

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oil States, expansion at existing refineries is expected to be the main source of an increase in US refining capacity. The Asia Pacific has been the region with the fastest growing refining capacity. In terms of distillation capacity, for example, the Asia Pacific has surpassed western Europe as the world’s second largest refining centre and is only marginally below the capacity in north America. In China, there has been a significant increase in oil refining capacity. Oil refining capacity in China is estimated to have reached around 6.2 million barrels a day in early 2006, more than double the level ten years ago.

Increased demand for light sweet oils A shortage of refining capacity reflects not only insufficient investment in the global oil industry, but also a mismatch between the available grades of crude oil and the prevailing refinery capacity. Sour and sweet oils require different types of refining. Sour grades (such as those commonly pumped in Saudi Arabia with a higher content of sulfur) are more costly to refine into clean, low sulfur fuels than sweet grades (such as those common to the United States). The upgrade of refineries to refine sour oils is expensive and time consuming. In general, the more stringent the requirements of sulfur content and viscosity, the lower the yield of sweet, light petroleum products per litre of heavy, sour crude oil. While a significant increase in global oil production has been achieved, the majority of the increase has been in the World refinery capacity heavy and sour types. For example, non-OPEC crude production was around 50.1 million barrels a day in 2004 and the split was around 33 per cent light, 49 per cent medium 80 and 18 per cent heavy. This compares with 41, 44 and 15 China per cent respectively in 2000. In terms of sulfur content, 51 United States 60 per cent of non-OPEC crude production was sour in 2004, compared with 47 per cent in 2000. 40 Rest of OECD Demand for oil in many OECD markets has increasingly been for light and sweet crude. This has largely been the result of regulations mandating lower levels of sulfur in petrol 20 Rest of world and diesel fuels. There have been changes to regulations in Canada, Europe, Japan and the United States restricting the mbd level of sulfur in fuels. Further restrictions are scheduled in 1971 1978 1985 1992 1999 2006 2006 for the Untied States, Japan and Europe.

Investment required for stringent environmental standards In order to meet the more stringent environmental standards, existing facilities will require upgrading or replacement. At the same time, other downstream industries, specifically pipelines and tankers, will also need to be maintained and expanded. Investment decisions to fund upgrading, replacement and expansion of global refining capacity are complicated by uncertainties about oil prices, demand and the time required for upgrading and construction (between two and eight years). The experience of overinvestment following record high oil prices in the 1970s and 1980s has also increased the degree of cautiousness that investors exercise in their decision. While estimates of the investment needed to meet global demand for petrol and petroleum products vary, the International Energy Agency projects that annual investment of around US$105 billion will be required by the global oil industry between 2005 and 2030. Of this projected investment, only 25 per cent would be directed toward meeting new demand; the 94

australian commodities > vol. 13 no. 1 > march quarter 2006

oil rest would be for maintaining or replacing existing production facilities, refineries, pipelines and other equipment.

Medium term prices depend on world oil supply The projection of a significant decline in world oil prices (in 2006 dollars) toward the end of the medium term is based on the assessment that world oil production will continue to increase. Some market commentators have suggested that world oil prices will continue to increase from current high levels over the medium to longer term based on concerns that global oil production has peaked and world oil production will decline significantly from now on. Many international agencies, including the International Energy Agency, OPEC and the International Monetary Fund, disagree with the assessment that global oil production has peaked. They argue that only around a quarter of world oil reserves have been used and oil supplies will keep pace with demand. Based on this assessment, the majority of market participants are forecasting that oil prices, in real terms, will decline toward the end of the medium term. Much of this debate focuses on when the peak in oil production will occur. The answer to this question depends, in large part, on the size of remaining oil reserves in the world and technological advances in the use of oil in final applications, exploration success and the recovery of oil from existing oil fields. Many international agencies, including the US Energy Information Agency, the US Geological Survey and the International Energy Agency, do not share concerns over the size of the world’s remaining oil reserves. Proven oil reserves have been increasing, rather than declining, over the past decade and this growth in oil reserves is expected to continue. The US Energy Information Agency projects that world oil supplies in 2025 will exceed the 2001 level by 53 per cent.

Technological progress to reduce oil dependency On the demand side, technological progress is expected to lead to a continued reduction in oil dependency. Despite the remarkable economic expansion over the past two decades, many major oil consuming countries have become much less dependent on oil than they were in the 1970s. Energy conservation and substitution of other energy sources have resulted in a significant reduction in oil consumption, especially when measured in per unit gross domestic product. In major OECD countries, for example, oil dependency is estimated to have declined by more than 50 per cent since the 1970s. It is possible that the development and adoption of new fuel efficient technology, such as hybrid cars, or efficiency enhanced policy measures could produce even more rapid reductions. Technological progress will also be critical to future increases in exploration success and recovery of oil from existing oil fields. According to the International Energy Agency, technological improvements have contributed to an increase in the success rate of oil exploration from about 20 per cent in the 1940s to over 40 per cent in recent years. Technological improvements have also contributed to a long term decline in the average cost of oil production (in real terms). Even with current high prices, oil is cheaper than in the early 1980s, when measured in 2006 dollars. Technological progress will be an important factor in determining oil prices over the medium to longer term. If significant technological advances can be achieved, it would be reasonable to expect oil prices to decline gradually in real terms. If significant technological improvements cannot be achieved, then consistent upward price pressure is likely to result.

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oil Global oil production to increase Under the assumptions of average seasonal conditions, global oil production is forecast to rise by almost 3 per cent to 86.4 million barrels a day in 2006. This compares with an estimated rise of 1.3 per cent to 84.1 million barrels a day in 2005. The forecast higher oil production in 2006 is expected to come from both OPEC and non-OPEC producers. While higher OPEC oil production is forecast for 2006, considerable uncertainty remains in this short term outlook. As discussed earlier, there is a proposal by the United States and European countries for possible sanctions against Iran. A significant decline in oil exports from Iran would adversely affect total OPEC oil supplies. There is also considerable uncertainty about oil production in Nigeria. Nigerian production is estimated to have declined by 10 000 barrels a day to 2.46 million barrels a day in December 2005. While the deepwater Bonoga field (with a capacity of 225 000 barrels a day) entered production in late November, militant attacks on oil pipelines forced the shutin of the Bonny flow station and production of 180 000 barrels a day in late December. Further attacks occurred in January 2006, with a temporary shutdown of Shell’s oil facilities. An escalation of conflict in Nigeria, if it were to occur, could significantly disrupt oil production in that country. OECD oil consumption Over the medium term, global oil production is projected to increase gradually to 93.5 million barrels a day in United States 2011. Non-OPEC production is projected to increase by around 1.5 per cent a year toward 2011, compared with Western Europe an average rate of 1.7 per cent over the five years ended 2005. The projected slower growth in non-OPEC production Japan mainly reflects declining productivity from mature oil fields, particularly those in the North Sea and on shore wells in the Korea 1979 United States. Mexico Canada mbd

2005

OECD oil production OECD oil production has been in a steady decline in recent years. In 2005, OECD oil production is estimated to have 5 10 15 20 averaged around 20.3 million barrels a day. This compares with production of 21.3 million barrels a day in 2004. Over the outlook period, OECD oil production is projected to decline further to around 19.9 million barrels a day in 2011. Higher projected output in north America, largely from increased production in the Gulf of Mexico region, is expected to be more than offset by reductions in European and OECD Pacific production. Oil production in the Gulf of Mexico region was around 1.5 million barrels a day prior to Hurricanes Katrina and Rita. With several new projects expected to come on line in the next few years, output in the Gulf of Mexico region is projected to increase gradually to around 2.2 million barrels a day in 2011.

Production in the Russian Federation Following growth of close to 10 per cent a year between 2001 and 2004, growth in oil production in the Russian Federation slowed to an estimated 2.7 per cent in 2005. This slowdown mainly reflects the adverse impact of continued government intervention and regulatory uncertainties facing the Russian oil industry (see the accompanying box). While growth in oil production has picked up gradually since late 2005, uncertainties continue to cloud the environment for foreign investment and large scale expansion projects. 96

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oil Oil production in the Russian Federation is forecast to rise by 3.3 per cent to 9.8 million barrels a day in 2006. Production increases are expected to come from a number of production facilities, including the Sakhalin 1 project, TNK-BP and Lukoil.

World oil consumption growth to rebound in 2006 Global oil consumption is estimated to have risen by 1.3 per cent to 83.3 million barrels a day in 2005, compared with growth of 3.8 per cent in 2004. The slower growth in 2005 mainly reflected lower growth in north America and China. After growth of 15 per cent in 2004, oil consumption in China is estimated to have increased by a further 3 per cent in 2005. In north America, growth in oil consumption eased from 3.3 per cent in 2004 to an estimated 0.5 per cent in 2005, partly reflecting the adverse impact of higher prices for petrol and petroleum products and the disruptions to economic activity as a result of hurricanes Katrina and Rita. World oil consumption is forecast to increase to 85.1 million barrels a day in 2006 from 83.3 million barrels a day in 2005. Stronger growth in oil consumption is forecast in China, north America and the Russian Federation. Over the medium term, global oil consumption is projected to increase gradually to 92.5 million barrels a day in 2011.

Oil production in the Russian Federation and the Caspian Sea area The importance of the Russian Federation and producers in the Caspian Sea area, including Kazakhstan and Azerbaijan, in world oil markets has increased significantly. In 2005, this region accounted for around 14 per cent of world oil production and nearly a quarter of non-OPEC supply. The Russian Federation is the largest regional producer, with production of 9.5 million barrels a day in 2005 (or equivalent to around 80 per cent of regional production). Around 70 per cent of oil output in this region is exported, predominantly to markets in Europe. The region also has large proven oil reserves. At the end of 2003, for example, the Russian Federation had the seventh largest proven oil reserves in the world and the largest among non-OPEC producers. Various sources (including the International Energy Agency) estimate Russia’s proven oil reserves at 60–69 billion barrels, equivalent to around a quarter of Saudi Arabia’s proven oil reserves. When probable reserves (which have a smaller probability of being produced profitably) are also included, the estimate rises to 116 billion barrels. Despite falling output throughout much of the 1990s, oil production in the Russian Federation and the Caspian Sea area increased by an annual average of 8.7 per cent between 2001 and 2004. Since the beginning of 2005, however, growth in oil production has slowed, with production rising by 3.3 per cent for 2005 as a whole. A number of factors have contributed to the recent slowdown in production growth, including inadequate infrastructure, an uncertain investment environment, tight government control and less favorable taxation systems. While growth in regional production is forecast to increase

australian commodities > vol. 13 no. 1 > march quarter 2006

Oil production in the Russian Federation and the Caspian area 12 10 8 6 4 2 million bbl/day 1980

1985

1990

1995

2000

2005

to around 4.5 per cent in 2006, considerable uncertainty remains in the outlook for oil and gas production over the medium term, especially if these factors continue to hinder performance of the oil industry in the region.

Infrastructure issues The Russian Federation has an extensive system of oil and gas pipelines, reflecting the inland location of major oil and gas reserves. More than 80 per cent of Russian oil is exported via pipelines, either crossborder or to sea terminals. continued …

97

oil

Oil production in the Russian Federation and the Caspian Sea area With significant increases in oil production and exports in recent years, capacity bottlenecks in oil transport infrastructure have emerged as one of the key constraints to further expansion. While higher oil prices in recent years have made rail and barge transport viable economic alternatives, major bottlenecks are occurring in the pipelines and at the ports, especially those supplying the markets in western and northern Europe. Development of oil export pipeline infrastructure has been identified as one of the priority tasks of the Russian Government. Projects that have recently been undertaken include upgrading the Baltic Pipeline System. A recent bilateral agreement between the Russian Federation and Japan has led to the development of a pipeline system with a capacity of 1.6 million barrels a day from production facilities in East Siberia to the Pacific Ocean port of Nakhodka. This pipeline system, when it is completed, is expected to facilitate Russian oil exports to countries such as the Republic of Korea, Japan and China. Kazakhstan and Azerbaijan both rely on the Russian pipeline network for exports. In response to capacity constraints in the Russian Federation, Kazakhstan and Azerbaijan have been developing their own pipelines. In Kazakhstan, the construction of a direct pipeline from Atasu to Alashankou in China was completed in early 2006. In Azerbaijan, the construction of a pipeline from the capital, Baku, to the Mediterranean port of Ceyhan is likely to increase export potential and reduce Azeri reliance on the Russian pipeline network.

continued

to achieve the required level of investment to expand oil production and exports.

Government control Prospects for foreign investment in oil production and infrastructure in the region remain uncertain. Despite the importance of foreign investment to regional development, both the Russian Federation and Kazakhstan restrict the level of foreign investment in new projects. In Kazakhstan, for example, the state owned oil company, Kazmunaigaz, must own at least half of any production sharing agreement with foreign investors. Such a policy to preserve the interests of state owned enterprises could adversely affect foreign investment in the sector. In the Russian Federation, the investment climate was dampened by the ‘Yukos affair’ in 2003. There appears to have been further attempts by the Russian Government to nationalise the oil industry, with acquisitions of private oil companies by the two state controlled enterprises, Gazprom and Rosneft. Currently, approximately 25 per cent of Russia’s oil production is directly controlled by the government. In Azerbaijan, the State Oil Company of the Azerbaijan Republic (SOCAR) and its subsidiaries control oil production, refining and exports. While foreign investment has been on the rise following some relaxation of government policy, further deregulation of the domestic oil industry will be required to attract sufficient investment for production expansion over the medium term.

Investment

Potential export markets

Investment in oil exploration and production has increased in the Russian Federation and the Caspian Sea area since the beginning of the current decade. In the Russian Federation, for example, oil sector investment made up around 35 per cent of total industry investment between 2000 and 2003, which provided support for the significant increase in oil production over that period. While a significant increase has been achieved, the current level of total capital investment in the Russian Federation, amounting to around 18 per cent of gross domestic product, is still considered low relative to other fast growing economies in eastern Europe and Asia. The ratio of investment to gross domestic product in the Russian Federation is also low relative to the average of around 22 per cent in OECD countries. The significant growth in oil output in the early 2000s occurred partly as a result of bringing underutilised or idle facilities into production, and there still appears to be potential for greater and more efficient utilisation of existing facilities. Over the medium term, however, significant capital investment in new projects and infrastructure will be required to sustain high rates of production growth. A significant increase in foreign investment will be needed

At present, Europe is the largest external market for regional oil and gas production. However, regional supplies to Europe are unlikely to expand significantly over the medium term. This reflects the competitiveness of European energy markets and aspirations of regional governments for diversification of supplies to other markets, such as the Asia Pacific, in order to take advantage of the oil price differential. The Asia Pacific and north America are promising new markets for the region. However, promoting exports to these markets requires building new lengthy and costly pipelines and significant investment in both existing infrastructure and the underdeveloped oil and gas resources in East Siberia, the Far East and the Arctic Sea shelf. The ability of the region’s governments to attract substantial foreign investment to improve oil industry infrastructure will be an important factor for oil and gas production over the medium term. If the challenges can be successfully resolved, then oil and gas production in the region will increase significantly. Otherwise, capacity bottlenecks will persist and regional oil and gas production could even decline over the medium term.

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australian commodities > vol. 13 no. 1 > march quarter 2006

oil OECD consumption After growth of 1.7 per cent in 2004, OECD oil consumption is estimated to have increased by an estimated 0.4 per cent to 49.7 million barrels a day in 2005. OECD oil consumption is forecast to increase slightly faster in 2006, by 1.2 per cent to 50.3 million barrels a day. The forecast increase in OECD oil consumption growth in 2006 mainly reflects expected higher growth in oil consumption in north America, Japan and the Republic of Korea. In the United States, demand for gasoline and petroleum products rebounded in late 2005 and early 2006, mainly as a result of a decline in gasoline prices and reconstruction of hurricane related damage. US oil consumption is forecast to rise marginally to 20.8 million barrels a day in 2006. In Japan and the Republic of Korea, the weather has resulted in significant variations in consumption of petroleum products since late 2005. Colder than usual seasonal conditions have led to a significant increase in oil and gas consumption in both countries. In addition, a dry autumn in Japan has resulted in a significant decline in hydropower output. In response, thermal power generation has increased significantly. Starting from the 2006-07 financial year (April–March), Japan plans to lower import tariffs on petroleum products over six years. This is expected to contribute to lower domestic product prices, which would in turn provide support for higher demand. In the Republic of Korea, the government has extended tariff cuts on crude and petroleum products to the end of 2006 in an effort to mitigate the impact of high oil prices on the economy. Oil consumption in Japan and Korea is forecast to rise by 0.6 per cent and 1.8 per cent respectively in 2006.

Oil consumption in China China is the world’s second largest oil consumer (next to the United States), accounting for around 8 per cent of global oil consumption in 2005. Oil consumption in China is forecast to increase by 6 per cent in 2006. While strong fuel oil demand has underpinned growth in China’s oil consumption in the past few years, the demand for transport fuels is expected to become increasingly important. Demand for fuel oil in power generation is not expected to increase significantly, as the problem of power shortages in China has abated and the power generation sector is moving away from using relatively high priced fuel oil to produce electricity. China’s government recently indicated its intention to end domestic price controls on coal used for power generation in the short term, allowing power companies to negotiate their own prices. Petroleum product imports, China In an attempt to increase domestic supplies, China’s Monthly, ended November 2005 government recently announced a 25 per cent reduction in Gasoline, diesel, LPG and others export quotas for petroleum products. Chinese authorities Heavy fuel oil 800 will closely monitor exports of petroleum products to avoid a repeat of the domestic shortages that occurred in 2005. 600 In China, retail prices for petroleum products are administered by the National Development and Reform Commis400 sion (NDRC). Lower administered domestic prices relative to 200 world prices provide producers with an incentive to export petroleum products rather than target the domestic market. In kbd the presence of higher world prices, China’s net imports of petroleum products are estimated to have fallen by around 5 –200 per cent in 2005. This compares with an increase of 43 per Jan July Jan July cent in 2004. 2004 2005 australian commodities > vol. 13 no. 1 > march quarter 2006

99

gas Over the medium term, continued strong economic growth in China is expected to underpin growth in oil consumption. Given the progress of industrialisation in China, there is scope for China to significantly increase its oil consumption in the next several years. Toward 2011, China is expected to remain the world’s fastest growing oil consumer — with growth projected to average around 4.5 per cent a year.

Australian production and export earnings Australia’s production of crude oil and condensate is forecast to rise by 6 per cent to 26.9 gigalitres in 2005-06 and by 5 per cent to 28.3 gigalitres in 2006-07. Additional production from several new projects is expected to more than offset a decline in production from a number of Australia’s mature fields. The forecast higher production includes output from the Basker and Manta development in the Gippsland basin which commenced in mid-November 2005 and production from the Cliff Head project near Perth, which is reported to be on schedule for production in the first quarter of 2006. A further ramping up in production is also expected from the Mutineer/Exeter project in the Carnarvon Basin, with an estimated production capacity of around 100 000 barrels a day. With close proximity to Asian markets, it is assumed that additional production from Mutineer/Exeter and Cliff Head will mostly be exported. Australian exports of crude oil and condensate are forecast to increase by 7 per cent in 2005-06 to around 16.8 gigalitres, valued at $8.5 billion. In 2006-07, export earnings from crude oil and condensate are forecast to increase by a further 8 per cent to $9.3 billion. Over the medium term, production of crude oil and condensate is projected to peak at around 32.3 gigalitres (or 557 000 barrels a day) in 2007-08, as a number of new projects are developed and reach full production. The largest of these projects is Woodside’s Enfield oil field development, which is expected to begin operations in late 2006 and produce around 100 000 barrels a day at full capacity. It is expected that the majority of production from this development will be exported. For the remainder of the outlook period, Australian production of crude oil and condensate is projected to decline, as a result of lower output from mature fields. Crude oil and condensate production is projected to be around 29.0 gigalitres (or 500 000 barrels a day) in 2010-11. In 2005-06 dollar terms, export earnings from crude oil and condensate are projected to be around $7.8 billion in 2010-11, around 9 per cent lower than in 2005-06.

Liquefied natural gas Global LNG trade to increase World LNG trade has been growing strongly in recent years, driven by environmental concerns, energy security, fuel mix diversification policies and the uptake of gas fired electricity generation technologies. The Asia Pacific region currently accounts for around two thirds of world LNG trade. However, this share may decline to around half of world trade by 2011, as strong growth is expected in Atlantic LNG markets, particularly along the east coast of north America. Despite this, LNG imports in the Asia Pacific region are projected to increase by around 5 per cent a year to around 130 million tonnes in 2011.

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australian commodities > vol. 13 no. 1 > march quarter 2006

gas Key Asia Pacific LNG markets Over the outlook period, it is expected that countries such as Japan, the Republic of Korea, Chinese Taipei and India will continue to account for the majority of LNG imports in the Asia Pacific region. In Japan — the largest market in the Asia Pacific region — LNG imports are forecast to grow modestly over the outlook period, to around 62 million tonnes in 2011. In the Republic of Korea, the reliance on LNG fired power generation is expected to rise over the medium term. As such, imports are forecast to increase by around 5 per cent a year to more than 26 million tonnes in 2011. Strong growth in LNG imports is also forecast in Chinese Taipei over the medium term. Further expansions in gas fired power generation are expected to lead to higher imports of LNG, which are projected to rise from slightly over 7 million tonnes in 2005 to around 12 million tonnes in 2011. This projection is supported by the development of several gas fired power plants that will come on line during the outlook period. China is expected to be a key market for LNG over the medium term, with significant gas infrastructure currently under construction. This reflects the rapidly rising energy demand in that country and China’s plan to diversify the mix of its fuel consumption that is dominated by coal. LNG imports in China are forecast to exceed 8 million tonnes in 2011.

Outlook for LNG exporters Australian LNG exports are projected to increase significantly over the outlook period, supported by growth in both existing and new markets, such as China and the north American west coast. The projected increase in exports includes contributions of 3.5 million tonnes a year from the Darwin LNG project that came on line in early 2006 with its first shipment to Japan. The Darwin project will supply LNG to Japan for the next seventeen years. There are also other export projects proposed over the medium term, which will increase Australia’s annual LNG supply capacity. North West Shelf Train 5 (4.2 million tonnes) is due on line in late 2008, which will boost production at the plant to 15.9 million tonnes a year on completion. The Gorgon project (10.0 million tonnes) is expected to commence development over the next few years in order to be on line by 2010. Japan is expected to remain Australia’s single largest LNG export market over the outlook period. Other potential growth markets are the Republic of Korea, China and the north American west coast. Because LNG markets are highly competitive, the development of the abovementioned projects in Australia are dependent on whether sufficient contracts can be secured with consumers to cover significant capital costs. In order to retain existing customers, considerable price competition can be expected between suppliers when long term contracts expire. Over the outlook period, other key LNG exporters are also expected to increase production. In Indonesia, for example, additional LNG projects are proposed that could increase capacity by up to 10 million tonnes a year over the medium term. Specifically, the Tangguh project is expected to come on line in 2008, with production capacity of around 7.6 million tonnes a year. Additional LNG supplies to Asia Pacific markets could also come from the Middle East, especially Qatar. LNG production in Qatar is forecast to increase significantly in the short term, and this could result in Qatar seeking entry into the Asia Pacific markets. In the Russian Federation, LNG production is also scheduled to commence in the short term. The Sakhalin 2 project in Russia’s Far East is expected to become operational in late 2007, ramping up to full production of 9.6 million tonnes in 2008. australian commodities > vol. 13 no. 1 > march quarter 2006

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uranium Australia’s LNG exports to increase significantly Australia’s exports of LNG are forecast to increase by 24 per cent to 13.1 million tonnes in 2005-06, reflecting the commencement of production from the Darwin LNG project in early 2006. The value of LNG exports is forecast to increase by 56 per cent to around $5.0 billion in 2005-06. Higher production is projected to increase LNG exports steadily to around 20 million tonnes in 2010-11. In 2005-06 dollar terms, Australia’s LNG export earnings are projected to reach around $6.4 billion in 2010-11, an increase of around 29 per cent on 2005-06.

Uranium Uranium prices increase strongly in 2005 World U3O8 prices averaged US$28.5 per pound in 2005, an increase of 53 per cent on the 2004 average price of US$18.6 per pound. The dwindling supply of uranium stocks and increased concerns over the future supply of secondary sources of uranium were the major factors behind the substantial increase in uranium prices. Also providing support for prices in 2005 was an increase in investment demand for uranium. The Uranium Participation Corporation and Adit Capital Management were formed in 2005 with the primary objective of investing in uranium and achieving a subsequent appreciation in the value of their U3O8 holdings. Since being established in May 2005, the Uranium Participation Corporation has purchased over 1100 tonnes of U3O8.

Uranium price to increase in the short term The spot uranium price in 2006 is forecast to increase by 34 per cent to average over US$38 per pound. Despite this, world uranium mine production is forecast to increase by only 1 per cent in 2006. This reflects the substantial lead time required to bring new developments on stream. With world uranium requirements also forecast to increase by over 1 per cent in 2006, stocks are expected to decline further.

Medium term prices easing in real terms From 2007 world uranium prices in real terms are forecast to decline as strong growth in world mine production and relatively steady supplies of secondary uranium ease concerns about supply availability over the remainder of the outlook Uranium price period to 2011. In 2011, uranium prices (in 2005 dollars) Monthly, ended January 2006 are projected to be around US$29 a pound.

Secondary supplies to decline slightly over outlook period

30

20

10 2005-06

US$/lb 1995 102

1997

1999

2001

2003

2005

Secondary supplies of uranium are expected to decline only slightly over the projection period. Techsnabexport (Tenex) — a representative of the Russian Federal Agency for Atomic Energy — has indicated that, from 2008, it will no longer export highly enriched uranium (HEU) feed from the Russian Federation. However, the continuation of the US–Russian HEU purchase agreement (commonly known as the ‘Megatons to Megawatts’ agreement) and additional expected secondary supplies from the United States will largely offset the expected australian commodities > vol. 13 no. 1 > march quarter 2006

uranium decline in exports of HEU from the Russian Federation. The US–Russian HEU agreement is scheduled to end in 2013, beyond the end of ABARE’s outlook period. In late 2005 the United States announced plans to place HEU into an international fuel reserve. The US Department of Energy announced that it will contribute 17.4 tonnes (equivalent to around 5000 tonnes U3O8) of HEU to the fuel reserve, with the purpose of preventing the spread of enrichment technology. The HEU will be blended down over a four year period and is expected to be available for the fuel reserve in 2009. In early November 2005 the US Secretary of Energy announced plans to remove 200 tonnes of HEU from the US nuclear weapons stockpile. However, of this total, only 20 tonnes is currently designated for use in nuclear reactors. The remainder will be used for naval propulsion (160 tonnes) and space missions and research reactors (20 tonnes). In early 1999 a bilateral agreement was signed between the United States and the Russian Federation. The agreement provided for the creation of stockpiles of uranium in both the Russian Federation and the United States. Stockpiles of up to 22 000 tonnes of uranium hexafluoride (UF6) equivalent (or 26 000 tonnes of U3O8) will be held by both the Russian and US governments until 2009.

Demand for U3O8 to increase in the short term … The only significant commercial use for uranium is as a fuel for nuclear power plants. As of January 2006 there were 441 nuclear power plants worldwide, with a total generating capacity of over 368 gigawatts electric (GWe). The recent rise in electricity costs (associated with increases in coal and oil prices) and actions by signatories to the Kyoto Protocol to discourage greenhouse gas emissions have increased interest in nuclear power. World demand for uranium is forecast to increase by over 1 per cent in 2006 as capacity increases in India and China offset the likely closure of units 3 and 4 of the Kozloduy nuclear power plant in Bulgaria. In Canada, unit 1 of the Pickering A nuclear power plant has resumed operation following an idle period that began in December 1997. In China the 950 megawatts electric (MWe) units 1 and 2 of the Tianwan nuclear power plant are expected to commence commercial operation in early 2006. In India, unit 3 of the Tarapur nuclear power plant (540 MWe) is also expected to commence operations early in 2006.

Uranium outlook 2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

46.4 78.5 18.6 19.7

50.0 79.0 28.5 29.4

51.0 79.9 38.3 38.3

58.2 80.6 38.2 37.3

58.6 81.1 35.2 33.7

62.9 81.7 32.5 30.5

65.3 83.5 31.2 28.7

65.4 84.6 32.5 29.3

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

9 569 9 099 364 384 40.1 42.2

10 964 11 249 475 489 42.2 43.5

World

Production Consumption Spot price – real a

kt kt US$/lb US$/lb

Australia

t Production t Export volume Nominal exp value A$m A$m Real exp value b A$/kg Average price A$/kg – real b

11 883 12 440 712 712 57.2 57.2

11 284 11 284 786 767 69.6 67.9

11 284 11 284 705 671 62.4 59.4

11 034 11 034 676 628 61.3 56.9

10 584 10 584 576 522 54.4 49.3

10 084 10 084 590 521 58.5 51.7

a In 2006 US dollars. b In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources:Australian Bureau of Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

103

uranium … and the medium term Over the medium term, additions to nuclear capacity in China, India, the Republic of Korea and the Russian Federation, as well as further power uprates (a power uprate is the process of increasing the maximum power level at which a commercial nuclear power plant may operate) at existing nuclear power plants in the United States, are expected to be the major factors behind an increase in world uranium demand. In Finland, the 1600 MWe Olkiluoto-3 unit is expected to commence commercial operations in 2009. Lithuania is currently considering extending the operating life of the Ignalina nuclear power plant despite previously committing to shut down the plant by 2009 (as part of a deal to join the European Union). While an increase in the prices of non-nuclear energy sources and a growing desire by signatories to the Kyoto protocol to reduce greenhouse gas emissions is expected to encourage the construction of new nuclear reactors, the major impact of these trends is expected to occur beyond the projection period.

United States nuclear industry

Power uprates to increase nuclear energy output in the United States

The United States is the world’s largest consumer of uranium. Over the outlook period, an increase in demand for uranium Generation in the United States is expected to mainly reflect power uprates 600 75 and operating life extensions at existing nuclear reactors, Capacity rather than the construction of new nuclear reactors. While 50 utilisation 400 the Energy Policy Act 2005 is expected to increase the incentive to construct nuclear reactors in the United States, its major effect is assumed to occur beyond the outlook period. 25 200 Power uprates typically involve the use of more highly enriched uranium fuel, which enables the reactor to produce billion % more thermal energy. In order to accomplish this, the existing kWh infrastructure must be able to accommodate the conditions 1974 1980 1986 1992 1998 2004 that exist at the higher power level (US Nuclear Regulatory Commission 2004). From the late 1970s to the end of 2005, an estimated 4492 MWe of capacity was added in the United States through power uprates. The US Nuclear Regulatory Commission (NRC) is currently reviewing an estimated 935 MWe of submitted power uprate proposals. A number of reactors in the United States have also been granted operating life extensions. The Atomic Energy Act and NRC regulations limit commercial power reactor licences to an initial period of forty years but permit licence extensions. In all, 39 nuclear reactors have received twenty year licence extensions from the NRC, with extensions for ten nuclear facilities currently under review (US Nuclear Regulatory Commission 2006). In late December 2005 the Nuclear Regulatory Commission granted a twenty year license extension for units 1 and 2 of the Point Beach nuclear power plant (combined capacity of 1033 megawatts).

China, Korea and India plan to increase nuclear output Over the medium term, the largest additions to nuclear capacity are projected to occur in China, India, Chinese Taipei, the Republic of Korea and the Russian Federation. In Chinese Taipei, the expected completion of Taipower’s 1350 MWe Lungmen 1 and Lungmen 2 reactors has been delayed until 2009.

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uranium China currently has nine operating reactors, with a combined capacity of around 6600 MWe. As such, nuclear energy in China accounts for around 3 per cent of total electricity production. However, China’s government has indicated that it expects to increase its nuclear generating capacity to 40 gigawatts by 2020. India currently has fifteen operating reactors, with a combined capacity of around 3000 MWe. Nuclear power currently accounts for around 3 per cent of India’s total electricity generation. Eight nuclear reactors are currently under construction in India, which are expected to add another 3700 MWe to India’s nuclear capacity over the outlook period.

Adjustments to tails assays and reprocessing to have limited impact on uranium demand over outlook period An enrichment plant using gaseous diffusion technology can make adjustments to operating tails in order to optimise costs. However, the extent to which a higher level of separative work units (SWUs) can be used in the enrichment process is currently limited, as enrichment facilities in western countries are already operating at high capacity levels. Furthermore, a number of gaseous diffusion plants are also being closed down by both the United States Enrichment Corporation (USEC) and Eurodif. In addition, an increase in demand for enrichment services and higher electricity prices are placing upward pressure on the price of enrichment services. The existing electricity contract at USEC’s Paducah gaseous diffusion plant (electric power accounts for around 60 per cent of production costs) in the United States expires in mid-2006. As the Paducah plant is the only operating enrichment facility in the United States an increase in electricity prices is likely to increase SWU prices. To increase energy security, the government of Japan is advocating an increase in the recovery of uranium and plutonium through the reprocessing of spent fuel. The Rokkasho-Mura reprocessing plant (capacity of 800 tonnes of spent fuel a year) is expected to begin commercial operation in 2007. The Ukraine has also indicated that it is considering developing enrichment capacity in order to reduce dependence on the Russian Federation. However,

Uranium enrichment and reprocessing Natural uranium contains approximately 0.7 per cent U-235. Natural uranium cannot be used in light water reactors because the content of fissile U-235 is too low to sustain a nuclear reaction. Enrichment is the process of increasing the concentration of U-235, while decreasing the concentration of U-238. The majority of nuclear power reactors require low enriched uranium of 3–5 per cent U-235. The work required to perform enrichment capacity is measured in terms of separative work units (SWU). An SWU is a unit that expresses the energy required to separate U-235 and U-238. The amount of uranium enriched depends on: the quantity of uranium feed (UF6) at the beginning of the process; the amount of SWU used in the enrichment process; and the concentration of U-235 left over (tails assay) at the end of the process. By varying the level of tails assay, a reactor operator can find the most economical combination of UF6 feed and SWU required for enrichment. If the price of australian commodities > vol. 13 no. 1 > march quarter 2006

uranium is relatively low then it is more economical to use more uranium and less SWU in the enrichment process. Conversely, if the price of uranium is relatively high, it becomes more economical to use a greater amount of SWU in the enrichment process. An increase in the amount of SWUs used in the enrichment process reduces the quantity of U-235 in the tails (waste material) and lowers the quantity of natural uranium required in the enrichment process.

Reprocessing After being in a nuclear reactor for several months, a portion of the nuclear fuel must be replaced with new fuel. The spent fuel contains three components and includes U235, plutonium and other waste material. Reprocessing involves the chemical separation of the spent fuel into these three components. The U-235 can be again used as nuclear fuel whereas the plutonium can be used to create mixed oxide fuel (used in some European reactors). 105

uranium the Ukraine is yet to specify the time period over which this might occur. World enrichment and reprocessing capacity is expected to remain largely unchanged over the outlook period. As such, consumption of U3O8 over the outlook period is expected to grow in line with nuclear power generation. World demand for uranium is projected to grow at over 1 per cent a year over the medium term to be around 84 600 tonnes in 2011.

Known recoverable resources of uranium Australia Kazakhstan Canada South Africa Namibia Russia

World uranium supply

Brazil United States

0

5

10 15 20 Share of world total

25

30

The supply of uranium can be divided into two categories — primary mine production and secondary sources — with the latter made up of government and commercial inventories, recycled products and the conversion of highly enriched uranium (HEU) from nuclear weapons to commercial grade fuel for nuclear reactors.

World mine production to increase modestly in 2006 … Global mine production of uranium is forecast to increase by 2 per cent in 2006, driven by higher expected production in Namibia and Kazakhstan. First production from Paladin Resource’s Langer Heinrich project in Namibia (planned production of 1180 tonnes U3O8 a year) is expected in late 2006. In Kazakhstan, the Zarechnoye mine (590 tonnes U3O8 a year) is also expected to commence production in late 2006. The recent increase in U3O8 prices has led to an extension in the operating lives of a number of existing uranium mines. For example, the operating lives of the Rozna mine in the Czech Republic, Rio Tinto’s Rössing mine in Namibia and Energy Resources of Australia’s (a subsidiary of Rio Tinto) Ranger mine in Australia have all recently been extended. Uranium production from the Rozna mine was initially scheduled to finish in mid-2006 but may now continue until after 2008. In December 2003, Rössing Uranium Limited announced that the Rössing mine may close in 2007 because of pressure on profits associated with the strong appreciation of the South African rand (to which the Namibian dollar is linked) against the US dollar. However, Rio Tinto recently approved an extension of the life of the Rössing mine until approximately 2016. Under this proposal, the processing plant will be refurbished, enabling the mine to operate at its full production capacity of 4000 tonnes U3O8 a year within the next two years.

… but to rise strongly over the medium term The substantial rise in U3O8 prices over the past two years is expected to lead to a strong rise in world uranium mine output over the medium term. In early 2007, first production from Southern Cross Resources’ Dominion project in South Africa is expected, at an initial rate of around 1800 tonnes U3O8 a year. Production from Cameco, the world’s largest producer of uranium, is expected to increase significantly over the outlook period. Cameco’s Cigar Lake operation in Canada is expected to commence production in the first half of 2007. The operation will ramp up over a period of up to three years to full production of over 8000 tonnes U3O8. Cameco has applied for a licence to increase annual production from its McArthur River and Key Lake operations by 18 per cent. Cameco has estimated that, should this licence be approved, it will take around two

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australian commodities > vol. 13 no. 1 > march quarter 2006

uranium years to increase annual production from these particular operations to around 9500 tonnes U3O8.

Kazakhstan plans to increase uranium production In October 2005, Kazatomprom announced plans to increase its production of U3O8 substantially over the medium term by developing five new projects in Kazakhstan. The Central Mynkuduk and Inkai (Site number 4) are both scheduled to commence production in 2007 and will have a combined capacity of around 4700 tonnes U3O8 by 2010. Western Munkuduk and Budenovskoye (Site number 2) are scheduled to begin production in 2008 and have a combined capacity of around 2400 tonnes U3O8. In early January 2006, Kazamtomprom also announced that it was forming a joint venture with Sumitomo Corporation and Kansai Electric Power Company to develop a uranium deposit in southern Kazakhstan. The new joint venture will reach its full production capacity of 1180 tonnes of uranium oxide by 2011 (after commencing in 2010). World uranium mine production is projected to be over 65 000 tonnes in 2011.

Australian export earnings to rise strongly in near term All of Australia’s production of U3O8 is exported. Australia’s production of U3O8 is forecast to grow by over 8 per cent in 2005-06 to nearly 11 900 tonnes, largely because of higher output from BHP Billiton’s Olympic Dam mine and Energy Resources of Australia’s (ERA) Ranger mine. With uranium production and export prices both expected to increase in 2005-06, Australia’s export earnings from uranium are forecast to increase by 50 per cent to $712 million. Australia has only three uranium mines currently operating: BHP Billiton’s Olympic Dam mine in South Australia; ERA’s Ranger mine in the Northern Territory; and Heathgate’s Beverley mine, also in South Australia. In late October 2005, Energy Resources of Australia extended the operational life of the Ranger mine by three years. While mining activities at Ranger are still expected to finish in 2008, processing will now continue until 2014.

Exploration activity and expansion plans Expenditure on uranium exploration in Australia almost doubled (to $21 million) in 2004-05, stimulated by significant rises in world uranium prices. However, despite recent significant increases in expenditure on uranium exploration, uranium production over the outlook period is expected to be largely dictated by production from existing operations. Development of Southern Cross Resource’s Honeymoon project in South Australia is currently on hold, despite having approval to proceed to production. A decision on whether to develop the project is expected to occur in late 2006. BHP Billiton’s Olympic Dam mine has reasonably assured resources, which are recoverable at less than US$40 a kilogram of uranium, of over 499 000 tonnes of uranium. This makes Olympic Dam the world’s largest deposit of low cost uranium. An expansion of the Olympic Dam copper/uranium mine is being investigated and could underpin a significant increase in domestic U3O8 production over the medium term. However, given no specific indication has been provided of the size of the expansion and when it could be completed, this potential expansion is not included in the Australian uranium production forecast.

Export earnings projected to fall Over the remainder of the outlook period, Australia’s real export earnings from uranium are projected to decline to $521 million in 2010-11 as export volumes and export prices decline over the projection period. australian commodities > vol. 13 no. 1 > march quarter 2006

107

thermal coal

Thermal coal Thermal coal prices

Strong growth in coal fired electricity generation in Asia and a tightening of thermal coal supply led to higher thermal Weekly, ended 9 February 2006 coal spot prices in the first half of 2005. Increased supplies European spot thermal — mainly from a rapid expansion of thermal coal exports from Indonesia — spurred a decline in thermal coal spot 60 prices during the second half of 2005. Despite a partial Asian spot thermal recovery in early 2006, thermal coal spot prices remained 40 around 10 per cent below the contract prices negotiated between Australian exporters and Japanese power utilities Japan contract for the Japanese financial year 2005 (April–March). thermal 20 In early 2006, contract prices negotiated between a Japanese power producer and Australian coal exporters settled around US$41 a tonne fob Newcastle. This US$/t compares with contract prices of around US$52.50 a 2001 2002 2003 2004 2005 tonne a year earlier. Over the medium term, spot and contract prices are projected to fall in real terms. Ongoing improvements in coal mine productivity in key production regions and projected increases in thermal coal exports from major producers, including Australia, Indonesia and South Africa, are expected to offset any upward pressure on thermal coal prices. In addition, an easing of strong growth in global energy demand, partly as a result of energy efficiency improvements and conservation, is likely to place downward pressure on thermal coal prices.

Price outlook for the short to medium term After fluctuating around US$52 a tonne for much of the first half of 2005, Asian spot prices for thermal coal (excluding freight) declined to around US$38 a tonne in November 2005, before recovering to close to US$47 a tonne in early 2006. Much of the tightness in thermal coal supply experienced in the early part of 2005 has abated following a rapid increase in thermal coal exports from Indonesia. For 2005 as a whole, thermal coal exports from Indonesia increased by 20 per cent to 123 million tonnes. In the short term, thermal coal prices are expected to be supported, to some extent, by continued demand growth in the Asian region. A significant increase in international prices for oil and gas has led to some Asian countries, including China, moving further toward coal fired power generation. In addition, a decline in international freight rates since late 2005 is likely to lead to higher demand for Australian and Indonesian coal by European consumers, providing support for Asian thermal coal spot prices. Spot coal prices in the European and Asian markets were generally moving relatively closely as coal flows between regions quickly removed any price differentials. However, a significant increase in freight rates between late 2003 and mid-2005 excluded some supplies from more distant markets and thus created a divergence in thermal coal prices (excluding freight) between the two regions. Reflecting the effects of declining freight rates, interregional trade could once again become commercially viable and hence reduce or remove the price differentials between the two regions. Over the medium term, increases in coal sector productivity, driven by competitive pressures in the key coal export countries of Australia, South Africa and Indonesia, are projected to result in a steady decline in thermal coal prices in real terms. Partially offsetting this downward

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thermal coal pressure on prices will be growth in demand for thermal coal in power generation, especially in Asia. Growth in thermal coal exports from Indonesia and China is projected to be modest over the medium term. Diversion of exports to the domestic market is expected in these countries as a result of strong growth in domestic energy consumption.

Growth in world thermal coal trade World thermal coal trade is estimated to have expanded by around 4 per cent to 571 million tonnes in 2005. In 2006, thermal coal trade is forecast to increase by a further 2 per cent to 584 million tonnes. Over the remainder of the outlook period, global thermal coal trade is projected to increase by an annual rate of around 1.7 per cent, reaching around 636 million tonnes in 2011. The key drivers of growth in world thermal coal trade will be increased imports in a number of Asian countries, including Malaysia, Thailand, India, the Republic of Korea and China. In these countries, plans are in place to increase coal fired power generation capacity to meet rapidly rising electricity demand. In other Asian markets, such as Japan and Chinese Taipei,

Thermal coal outlook Unit

2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

Coal trade

Mt

550.4

570.6

584.1

592.8

605.0

617.0

628.2

636.3

Imports Asia China Chinese Taipei India Japan Korea Malaysia Other Asia Europe European Union Other Europe Other

Mt Mt Mt Mt Mt Mt Mt Mt Mt Mt Mt Mt

280.6 12.2 52.7 14.5 113.0 59.1 6.2 22.9 198.4 157.5 40.9 71.3

302.5 19.0 53.2 20.5 113.4 62.1 10.0 24.2 194.6 153.3 41.3 73.5

314.9 20.2 53.7 27.0 113.6 63.9 11.9 24.5 194.4 152.2 42.1 74.9

322.7 20.8 53.7 27.5 113.8 66.5 13.8 26.6 194.1 151.2 42.9 76.0

333.1 21.3 53.6 30.0 114.1 69.8 15.7 28.7 193.8 150.1 43.7 78.1

343.2 21.9 53.4 30.7 114.8 76.0 17.5 29.0 193.5 149.1 44.4 80.3

351.2 22.4 53.1 31.5 116.8 78.9 19.2 29.3 193.2 148.0 45.1 83.9

356.3 22.9 55.2 32.4 117.1 79.4 20.1 29.3 193.3 147.0 46.3 86.7

Exports Australia China Colombia Indonesia South Africa United States Other

Mt Mt Mt Mt Mt Mt Mt

106.9 80.2 51.2 102.3 66.4 19.0 124.4

107.6 66.5 54.6 123.3 67.2 18.5 133.1

112.8 65.0 60.0 129.3 71.1 18.0 128.0

114.7 70.0 61.6 130.2 74.0 17.5 124.8

118.2 75.4 63.3 130.9 77.0 17.1 123.1

124.9 75.6 65.1 132.1 81.0 16.6 121.7

131.7 75.8 67.0 133.1 84.0 16.2 120.4

134.7 76.0 69.0 135.7 85.5 15.8 119.7

2003 -04

2004 -05

Mt

170.6

170.4

175.5

179.2

182.9

188.9

196.6

202.7

Mt

106.7

106.4

111.1

113.7

116.5

121.6

128.3

133.2

A$m A$m

4 372 4 612

6 336 6 523

7 348 7 348

7 213 7 037

7 396 7 039

7 801 7 244

8 211 7 439

8 376 7 403

World

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

Australia Production Exports Volume Value – nominal – real a

a In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: International Energy Agency; Coal Services Pty Ltd; Queensland Government, Department of Natural Resources and Mines; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

109

thermal coal and more distant markets in Europe, growth is likely to be modest, although these markets are expected to remain important in global thermal coal trade.

Imports by Japan and the Republic of Korea Japan is expected to remain the world’s largest importer of thermal coal over the outlook period. Its imports are projected to remain around 114 million tonnes in 2006. Over the medium term, growth in Japan’s thermal coal imports could be constrained by Japan’s commitments to reduce greenhouse gas emissions under the Kyoto Protocol. Japan’s thermal coal imports are projected to increase marginally to World thermal coal imports, by region around 117 million tonnes by 2011. The strategies being pursued by Japan’s government to reduce greenhouse gas emissions include an expansion of 600 nuclear power generation capacity by 2010, promoting new and renewable forms of energy and reducing energy 500 Other consumption through efficiency improvement and conserva400 tion. In addition, the introduction of a tax on carbon emisEuropean Union sions over the medium term is being considered. 300 Despite these initiatives, coal is expected to remain 200 an important fuel for power generation in Japan over the Other Asia medium term. The relatively low cost and high supply secu100 rity of coal will continue to make coal an attractive source of Japan Mt energy. In an attempt to reduce air pollution, there has been 2005 2007 2009 2011 an emphasis in Japan on greater use of clean coal technologies in new power generation capacity. Several power plants using fluidised bed combustion and ultra supercritical Asian thermal coal imports technologies have been under operation. In the Republic of Korea, thermal coal imports are estimated to have increased by 3 million tonnes to 62 million tonnes in 2005. Coal is the cheapest fuel on a per unit heat Other Asia 300 basis and is favoured over other fossil fuels in the Korean Malaysia China market. Under Korea’s Second Basic Plan of Long Term ElecIndia tricity Supply and Demand, coal fired electricity generation 200 Chinese Taipei capacity is expected to rise by 13.4 gigawatts between 2004 and 2017, leading to higher demand for thermal Korea coal. Korea’s thermal coal imports are forecast to increase 100 by an average of around 4.0 per cent a year to 79 million Japan tonnes in 2011. Mt

2005

2007

2009

2011

ASEAN and Indian imports rising rapidly

Thermal coal imports in ASEAN countries, particularly in Malaysia, Thailand and the Philippines, have expanded significantly in recent years to an estimated 22.6 million tonnes in 2005. Thermal coal imports in the ASEAN region are projected to rise by an average rate of 8.4 per cent a year in the next several years, reaching around 37 million tonnes in 2011. Over the outlook period, additions to coal fired electricity generation of 5.0 gigawatts are expected in the region. This expected increase in power generation mainly reflects the incremental commissioning of the Tanjung Bin Power (2.1 gigawatts) and the Jimah Energy Ventures (1.4GW) in Malaysia and the Map Ta Phut IPP power project (1.4 gigawatts) in Thailand.

110

australian commodities > vol. 13 no. 1 > march quarter 2006

thermal coal While Malaysia has traditionally relied on natural gas for electricity generation, the authorities have been encouraging the development of coal fired power plants to increase the security of energy supply. Malaysia’s government plans to increase the share of coal in electricity generation from the current level of 25 per cent to 41 per cent by 2010. Much of the additional coal requirement will be met by imports, as the majority of Malaysia’s domestic reserves are low quality sub-bituminous coals and are located far from transport infrastructure. In Thailand, thermal coal imports have traditionally been used in the cement industry. Thermal coal demand from power generation in Thailand is projected to increase over the medium term. Underlying this assessment are expected rapid growth in domestic energy demand and a decline in production of lignite because of the adverse environmental effects. In India, thermal coal imports have risen rapidly, from around 0.4 million tonnes in 1994 to 20.5 million tonnes in 2005. In 2006 thermal coal imports are forecast to increase strongly to 27.0 million tonnes. India is the world’s third largest producer of thermal coal. However, a rapid expansion of India’s economy in recent years has led to a widening gap between India’s coal production and consumption, which has been met by a rapid increase in thermal coal imports. The high ash content of Indian thermal coal has led power companies to seek imported coal to blend with lower quality local coal in order to limit ash residue in power generation units. Also, locations of reserves in India are generally far from the main consuming areas. To overcome the logistical problems of transporting coal over large distances in India’s already heavily congested rail network, some power companies prefer to source thermal coal from imports. India’s coal sector is largely state owned and suffers from low productivity, profitability and investment. While structural reform of the coal sector has been envisaged, progress has so far been slow. In an effort to alleviate the shortages in coal supply, Coal India, the largest state owned coal company, has put forward a plan to boost coal production by around 100 million tonnes over the next several years. However, without a significant restructuring, private investment in India’s coal sector will be limited. Any major development will require significant support from the public sector. Over the medium term, growth in India’s thermal coal imports is expected to ease gradually from the recent highs. India’s thermal coal imports are projected to reach around 32 million tonnes by 2011.

EU imports declining In the European Union, coal imports and consumption are expected to decline gradually over the outlook period. For the past decade, EU thermal coal imports increased steadily, as domestic production declined more rapidly than consumption. Significant production capacity has closed in France, Spain, Germany and more recently Poland following reductions to production subsidies. In addition, environmental concerns have led to nuclear, hydroelectric and gas fired plants being favored over coal. Over the outlook period, the share of natural gas in the fuel mix is expected to rise, as EU members attempt to meet their obligations under the Kyoto Protocol. However, concerns over the security of energy supply, especially in the presence of current higher oil and gas prices, are likely to slow the decline in European coal production. Consequently, thermal coal production is expected to decline less than consumption over the outlook period. Imports of thermal coal by the European Union are projected to fall gradually toward 2011.

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thermal coal China an important participant in world trade China is the world’s largest producer of coal, with an estimated production of around 2.0 billion tonnes in 2005. In recent years, consumption and production imbalances in many regions have caused thermal coal imports to rise from around 1.8 million tonnes in 2000 to around 19 million tonnes in 2005. Given continued strong domestic demand for electricity, thermal coal imports are forecast to rise by 6 per cent to 20.2 million tonnes in 2006. Recent shortages in coal supply in China have encouraged significant investment to expand production capacity and infrastructure. Over the medium term, increased mechanisation of existing mines and closing of smaller, less efficient and unsafe mines will lead to productivity improvements in China’s coal industry. It is estimated that around 500 million tonnes of additional supply capacity are currently under construction. In response to growing environmental concerns, China’s government has been undertaking initiatives to encourage the use of cleaner energy sources and production methods. In preparation for the 2008 Olympic Games, for example, Beijing has begun a switch from coal to natural gas in an attempt to improve the air quality of the city. Over the medium term, thermal coal imports in China are projected to reach around 23 million tonnes in 2011. Much of the imported coal will be used in the south east coastal regions of China, which are more distant from the main coal producing region in the north west of the country. Reflecting regional consumption and production imbalances, China also exports thermal coal mainly to Asian markets. China’s export decision has been an important factor affecting global coal markets. Reflecting a rapid rise in domestic demand, thermal coal exports from China fell by 17 per cent to 66.5 million tonnes in 2005. Together with exports of around 5.3 million tonnes of metallurgical coal, total coal exports were significantly lower than the official quota of 80 million tonnes for the year. China’s thermal coal exports are forecast to fall further to around 65 million tonnes in 2006. As was the case in 2005, continued strong growth in domestic demand will limit China’s ability to export thermal coal in 2006. Over the medium term, there is a strong possibility that China’s thermal coal exports will gradually increase. Currently domestic prices in China are above international prices, leading to a reduced incentive for the four main coal exporting companies that have been granted export licences to supply the international market. Given projected increases in investment, and hence future production, the differentials between domestic and export prices could gradually disappear in the short term, especially if growth in energy consumption eases gradually from the highs in recent years. From 2008 onwards, China is assumed to maintain a constant target for total coal exports of 80 million tonnes a year. The share of thermal coal in total exports is likely to increase gradually toward 2011. This is because increases in metallurgical coal production will be constrained by relatively small domestic reserves, particularly of high quality metallurgical coal. A more detailed assessment of the metallurgical coal outlook is presented in metallurgical coal note in this issue.

Export prospects for other key producers With the recent reduction in China’s thermal coal exports, Indonesia has benefited as the closest major supplier to the rapidly growing Asian market. As mentioned earlier, thermal coal exports from Indonesia increased by around 20 per cent in 2005. In 2006, Indonesia’s thermal coal exports are forecast to rise by a further 5 per cent to 129 million tonnes. Coal production in Indonesia is forecast to rise by around 20 million 112

australian commodities > vol. 13 no. 1 > march quarter 2006

thermal coal tonnes to 170 million tonnes in 2006. Part of the increase in Thermal coal exports, by country domestic production will be consumed domestically, mainly as a result of increased electricity generation (forecast to be Indonesia around 3.0 gigawatts) from the Tanjung Jati B, Cilegon and 120 Cilacap coal fired power stations. Over the medium term, further development in Indonesia’s Australia coal sector will be challenged by ongoing weak investment 100 in exploration, a decline in coal quality and an increase 80 in production costs as the industry is moving inland. Most China of Indonesia’s coal resources are sub-bituminous in nature, containing less energy per unit than higher calorific thermal 60 coals from competing exporters. The limited availability of higher quality coal in recent years has led to a rapid Mt rise in demand for lower quality coal, particularly in the 2005 2007 2009 ASEAN region, Chinese Taipei and the Republic of Korea. However, this situation is not expected to persist into the medium term. Domestic coal consumption in Indonesia is projected to increase over the medium term. Coal is likely to replace oil as the main source for meeting growth in domestic energy demand over the medium term. As a share of total domestic electricity production, coal fired generation is projected to increase from 18 per cent in 2004 to 38 per cent in 2020. Indonesia’s thermal coal exports are projected to increase by an average of 1 per cent a year to around 136 million tonnes in 2011. However, considerable uncertainty remains in the outlook for Indonesian thermal coal exports. Disruptions from seasonal conditions can affect production. Social instability has contributed to an uncertain investment environment that could adversely affect the development of additional coal projects. The majority of thermal coal exports from South Africa, the United States and Colombia are shipped to European markets, mainly because of lower freight costs as a result of shorter transport distances compared with shipping into Asian markets. Colombia, the largest Latin American exporter, increased exports of thermal coal by nearly 7 per cent to 54.6 million tonnes in 2005. Colombia is a low cost producer relative to other competing exporters, including South Africa and the Russian Federation, with its exports being highly sought after for its attributes, including a lower sulfur content. Colombian thermal coal exports are forecast to increase by around 10 per cent to 60 million tonnes in 2006. South Africa is capable of operating as a swing exporter to both Atlantic and Pacific markets. Thermal coal exports from South Africa increased only by 1 per cent to 67.2 million tonnes in 2005, reflecting capacity constraints and disruptions to the country’s rail network. Spoornet, the state owned rail monopoly, has commenced upgrades of the rail network that will expand South Africa’s export capacity. In addition, lower freight rates and aggressive expansion plans for the Richards Bay coal terminal are expected to lead to higher exports.

2011

Australian thermal coal exports to rise In early 2005, infrastructure constraints along the coal supply chain in New South Wales and Queensland limited, to some extent, Australia’s ability to respond to strong growth in world thermal coal trade. Since then, investment has been undertaken or proposed to provide expansions in export infrastructure.

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113

thermal coal For example, expansions at the Gladstone port in Queensland (the main port for thermal coal exports in that state) are currently under construction. This project is expected to increase export capacity by 11 million tonnes when it 125 is completed in 2006. Port capacity is also expected to expand at Newcastle by around 43 million tonnes toward 100 the end of the projection period. Volume 75 Australian thermal coal exports are forecast to be around 111 million tonnes (or $7.3 billion) in 2005-06, 50 an increase of 4.7 million tonnes (or $1012 million) on 2004-05. In 2006-07, the adverse impact on export earn25 ings of forecast lower spot and contract prices is expected to be partially offset by a further increase in export volumes Mt and an assumed lower average value of the Australian 2006 2008 2010 -07 -09 -11 dollar. Earnings from thermal coal exports are forecast to be around $7.2 billion in 2006-07. Over the medium term, Australia’s coal production capacity is expected to increase significantly in response to a marked increase in investment. Capacity expansions, currently under construction or being committed to, are projected to increase domestic production to 203 million tonnes in 2010-11. Projects being brought on line, including the Ashton, Mount Arthur, Rolleston, and Ravensworth west projects, will contribute an additional 20 million tonnes by 2010-11. Projects ready to enter the construction phase, such as Ulan Underground, Mount Owen, Wambo Underground, Kogan North, Clermont and Coorabong/Mandalong, could provide an additional 14 million tonnes out to 2010-11. Australian thermal coal exports (in volume terms) are projected to increase by an average of close to 4 per cent a year toward 2010-11. Higher export volumes and an assumed depreciation in the Australian exchange rate are expected to more than offset the adverse impact on export returns of lower contract and spot prices in real terms. Export earnings from thermal coal, in 2005-06 dollars, are projected to be around $7.4 billion by 2010-11, marginally higher than the forecast export value in 2005-06.

Australian thermal coal exports

7

Value

6 5 4 3 2005-06

A$

2004 -05

114

australian commodities > vol. 13 no. 1 > march quarter 2006

steel contents

> Will Millsteed 2 6272 > [email protected] Contact > +61>2+61 6272 ???? 2012 > [email protected]

steel and steel making raw materials prospects for iron ore, steel, metallurgical coal and nickel Simon Richmond, Will Millsteed and Ryan Wilson

> Global steel consumption growth will be underpinned by continued strong urban investment in China, with support from newly industrialising nations India and Brazil, and renewed growth in US steel consumption. Global steel consumption is projected to grow to 1.41 billion tonnes in 2011. > Historically high prices have spurred investment in metallurgical coal production, particularly of high quality hard varieties, leading to easing prices in 2006. Increased production of all coal types is projected to lead to easing market conditions over the outlook period. > Continued constrained growth in mine and concentrate supply is forecast to keep world nickel prices above historical prices in 2006 and 2007. Beyond 2008, significant growth in refined nickel production is projected to result in a weakening of world nickel prices toward longer term trend.

Iron and steel Global steel production is forecast to rise at an average annual rate of 3.7 per cent to reach 1.41 billion tonnes in 2011, underpinned by strong growth in Asian steel demand.

Iron ore prices Iron ore contract prices for the Japanese financial year (JFY) 2006-07 had not been settled at the time of writing. Factors pointing to another rise in contract prices include: rising global steel production, led in particular by China; limited growth in iron ore supply capacity by the world’s major producers Coal and iron ore prices in Australia, Brazil and South Africa; and sustained and high spot prices for iron ore in China. Reflecting this current 60 outlook, negotiated iron ore prices for JFY 2006-07 are fore- 120 cast to rise by about 12 per cent to US69.9c/dltu for fines 100 50 and US89.3c/dltu for lump. Iron ore fines 80 40 Since 2003, negotiated benchmark iron ore prices have more than doubled. Prices increased by 71 per cent for JFY 60 30 2005-06, 19 per cent in JFY 2004-05 and 9 per cent in JFY 40 Hard coking coal 20 2003-04. High prices in this period stimulated substantial investment in new iron ore production and transport capacity, Semisoft coking coal 20 10 2006 much of which is anticipated to start to come on stream in the 2006 USc/dltu second half of 2006 (discussed in more detail below). With US$/t 1986 1991 1995 2000 2005 2011 further increases in capacity also anticipated beyond 2006, australian commodities > vol. 13 no. 1 > march quarter 2006

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steel capacity utilisation rates are expected to decline and stock levels to rise throughout the supply chain. For example, the seaborne supply capacity of the world’s largest three producers (CVRD, Rio Tinto and BHP Billiton) is expected to increase by around 100 million tonnes (20 per cent) by late 2007. This substantial increase in the availability of iron ore, particularly from low cost suppliers, is projected to lead to easing prices in the medium term.

Coal prices In contrast to the expected movement in iron ore prices, contract prices for hard coking coal are forecast to fall by 8 per cent in JFY 2006-07 to US$115 a tonne. Indeed, in late January 2006 the first significant contracts for hard coking coal were finalised between BHP Mitsubishi Alliance and Nippon steel for benchmark Peak Downs and Saraji coals, and midrange volatility Goonyella coal. The contracts included reductions of $9 and $11 a tonne from last year’s prices, to $116 and $114 a tonne respectively. Prices for semisoft and PCI coals are forecast to fall by 31 per cent and 34 per cent to US$55 a tonne and US$66 a tonne respectively, with contracts recently settled between market players indicating falls of this magnitude. Between 1984 and 2004, prices for semisoft coals were negotiated at an average premium of 9 per cent above benchmark thermal coal prices. However, in JFY 2005-06 many metallurgical coal producers were able to package sales of semisoft and hard coking coals together at the hard coking coal price. As a result, the average premium for semisoft coals rose to 52 per cent above benchmark thermal coal prices. In 2005, supply constraints in key metallurgical coal supplying nations have eased, albeit from chronically tight levels. In addition, growth in demand for semisoft and PCI coals in 2006 is expected to ease from the rates of growth experienced in 2003 and 2004. As a result, negotiated benchmark prices for these coals are forecast to fall in JFY 2006-07 as the premium above benchmark thermal coal prices returns to a level closer to its long term average.

Medium term outlook for prices With the rapid and large increase in global mining activity over recent years, a significant global shortage of inputs required for resource project developments has arisen, especially in mining service equipment, such as haul pack truck tyres and rail wagons, and for skilled labor. Furthermore, with little scope for rapid additions to the stock of mining equipment or skilled labor, the cost of adding new production capacity is expected to remain relatively high for a number of years. This situation will limit capacity expansions in the short term across many minerals commodities, including iron ore and coal. However, beyond 2008, steel making raw material prices are expected to come under renewed downward pressure reflecting a combination of increased supply of iron ore and improvements in steel plant efficiencies, including the more efficient use of coke and increased use of pulverised coal injection (PCI). The increased supply of iron ore is expected to flow principally from the world’s three largest producers, as is discussed in more detail below, while improvements in global steel plant efficiencies are expected to result from the substantial investment in new blast furnaces, particularly in China. The iron required for the world’s rapidly growing steel makers (led by China) and other industrialising nations will be sourced predominantly from newly constructed blast furnaces that utilise more efficient technologies than existing blast furnaces. The reduced fuel rates of newer blast furnaces reflect the more efficient use of coke and the increased use of PCI for which many older blast furnaces are not equipped; hence providing reduced reliance on metallurgical coal and easing price pressures. This, coupled with a projected increase in the supply of metallurgical coal over the outlook period, will contribute to the expected fall in prices of metallurgical coal. 116

australian commodities > vol. 13 no. 1 > march quarter 2006

steel Global steel consumption Growth in world steel consumption is being driven largely by developments in China, the United States and India. China

Reflecting strong growth in both domestic consumption and exports, China’s output of steel intensive goods rose strongly in 2005. For example, the production of motor vehicles, civil steel boats and ships, and large tractors increased by approximately 10 per cent, 25 per cent and 50 per cent respectively year on year. Furthermore, the strong growth in China’s production of nonsteel intensive manufactured goods such as fax machines, mobile communication equipment and microcomputers — which rose by 24 per cent, 56 per cent and 51 per cent respectively over the corresponding period — has supported strong growth in demand for new factories and buildings and, hence, construction steels. As an estimated 80 million people migrated from rural to urban areas between 2000 and 2005 in response to increased employment prospects, urban investment in fixed assets has increased significantly, rising by approximately 28 per cent in 2005. This is significantly higher than the government target rate of 16 per cent, and highlights the strong underlying growth in infrastructure investment in China currently. The United Nations Council on Trade and Development (UNCTAD) expects strong rural–urban migration to continue, with a further 70 million people to move to China’s urban areas by 2010. This is expected to support substantial further urban investment and steel consumption. Apparent steel consumption in China is estimated to have grown by over 17 per cent in 2005 to total 355 million tonnes.

World steel outlook

Consumption EU 25 North America Brazil Eastern Europe China Japan Korea Taiwan India World steel consumption Production EU 25 North America Brazil Eastern Europe China Japan Korea, Rep. of Taiwan India World steel production

2004

2005

2006

2007

2008

2009

2010

2011

182 143 20 58 302 80 47 26 38

188 145 19 61 355 81 48 27 41

190 147 20 62 390 82 48 27 43

192 150 22 64 419 82 48 28 46

193 154 23 67 450 83 49 28 49

194 158 24 69 459 83 49 28 52

195 162 26 71 483 83 49 28 56

196 166 28 73 511 83 49 28 61

1 061

1 137

1 185

1 233

1 283

1 312

1 358

1 408

193 116 33 121 272 113 48 20 33

186 110 32 119 349 112 48 19 39

188 110 33 123 392 112 48 19 41

189 111 35 126 428 113 48 19 44

190 113 39 130 460 113 49 19 49

191 115 44 134 473 114 49 20 56

192 117 48 138 493 114 49 20 60

193 119 52 142 518 115 50 20 63

1 058

1 129

1 183

1 233

1 285

1 320

1 360

1 405

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steel In 2006, Chinese steel consumption is forecast to rise by 35 million tonnes to 390 million tonnes. North America

Strong demand growth from United States and Canadian steel consumers in 2005, such as the automotive and electrical appliances sectors, is expected to ease over the medium term as production facilities relocate to countries with lower input costs, such as China and Korea. Higher energy prices and stringent emissions policies that promote the production of smaller and lighter cars are also expected to moderate growth in steel demand in the north American motor vehicle sector. Counterbalancing this, industrial activity in Mexico is projected to grow strongly. Over the medium term north American steel consumption is forecast to increase by 21 million tonnes to reach 166 million tonnes in 2011. India

The Indian economy is assumed to grow strongly over the outlook period. Investment in transport infrastructure in particular, such as railroads and bridges, is expected to underpin strong growth in steel consumption. As a result, India’s consumption of crude steel is forecast to rise by an average 6.8 per cent a year to reach 61 million tonnes in 2011 (albeit steel consumption in India is growing from a relatively small base).

Steel making technologies Many blast furnace based steel producers continue to make substantial efforts to increase their productivity in response to competition from alternative steel making processes, including steel production using electric arc furnaces (EAF) and the production of molten iron by direct smelting. Because new steel making technologies use inputs such as iron ore and coking coal more efficiently, they have the potential to have an impact on the demand for steel making raw materials.

Electric arc furnaces Electric arc furnaces melt steel scrap (often with small amounts of pig iron) to form a product that can then be reshaped and used again. The advantages of electric arc furnaces relative to blast furnace operations are that a range of feedstocks can be used and the use of electricity as the primary energy source enables the process to be operated (and shut down) in a flexible manner. New casting techniques also allow for a significantly smaller scale of production in rolling the crude steel. Smaller scale mills (often referred to as minimills) are a particularly attractive option as full scale economies can often be achieved at a fraction of the size of large scale blast furnace operations. Furthermore, minimills emit substantially less quantities of sulfur which makes them an attractive option in countries with stringent emission abatement policies, as has been the case in the United States. Historically, the limited availability of scrap with sufficiently low residual impurities to make the production of flat steel products, meant minimills generally produced lower cost long products, which are typically used in the construction sector. However, in the late 1980s a new thin slab casting technology was developed and over the next decade the proportion of steel produced in EAFs in the United States rose from 37 to 47 per cent. The strong rise in EAF production also supported the development of hot briquetted iron (HBI) plants where iron briquettes are mixed with scrap (in an EAF) to yield high quality steel. Furthermore, the briquettes can also be used in blast furnaces to improve the quality of the iron inputs, therefore reducing reliance on coke in the production of molten iron. As the production 118

australian commodities > vol. 13 no. 1 > march quarter 2006

steel of HBI is a heavily gas intensive process, new production facilities are typically colocated with abundant low cost reserves of natural gas, such as in Iran, Venezuela, Mexico, Saudi Arabia and Egypt. Scrap steel currently constitutes over 80 per cent of the raw material feed requirement for electric arc furnaces. As scrap steel is principally sourced from obsolete capital equipment such as machinery, ships, automobiles and bridges that typically have an average life of around fifteen years, steel consumption from over a decade ago largely determines the current availability of scrap. As a result, growth in crude steel sourced from electric arc furnaces is mainly expected in north America and western Europe. However, as total steel production in these regions is expected to increase only marginally, the proportion of crude steel produced globally in electric arc furnaces is expected to fall slightly over the projection period.

Direct smelting At present there are a number of facilities and considerable ongoing research into iron making methods based on smelting reduction that are aimed at competing with blast furnace operations. Some examples of these technologies include Corex, Finex, Romelt, Iron Dynamics and the recently commissioned HISmelt facility in Western Australia. A key advantage of direct smelting technologies is seen as the elimination of the energy intensive coke making and sintering stages that are required at integrated facilities, allowing the direct production of iron to have a lower carbon footprint. Furthermore, the feedstock requirements for many of these technologies are more flexible. For example, iron ore fines with high phosphorous content and coals with lower calorific value (and hence lower cost) can be used. However, the commercialisation of direct smelting technologies has met with some difficulties and until direct smelting technology can be proven as a cost competitive alternative to blast furnace iron production, it is not expected to be widely adopted. Reflecting this, pig iron production via direct smelting is not expected to grow strongly over the outlook period.

Blast furnaces Despite improvements in technologies and an increase in the complement of steels produced in EAF mills, the integrated production of crude steel using the combination of a blast furnace and basic oxygen furnace remains the most common means of producing high quality crude steel in large volumes. Over the years, steel makers have continually invested in new technologies to optimise output. Arguably the most important recent development has been the increased use of PCI whereby the coal is pulverised and injected directly into the furnace. One advantage of direct injection is that the use of high cost coking coals can be reduced. It is estimated that 1.0 tonne of PCI coal typically replaces approximately 1.4 tonnes of coking coal, per tonne of hot metal produced. Other advantages include the wider availability of PCI coal and a reduction in the demands placed on the coke ovens, which enables a reduction in emissions and extends the life of the coke ovens. This factor is particularly important for steel makers with coke ovens nearing the end of their productive lives, and for those located in countries with stringent emission abatement policies. The use of PCI coal per tonne of hot metal produced (referred to as injection rates) reached a global average of around 114 kilograms in 2004. Current sustainable best practice is around 175 kilograms of PCI and 325 kilograms of coke per tonne of hot metal produced. This suggests that injection rates are likely to increase over the medium term as capital equipment in the steel industry is renewed or existing equipment is modified to enable PCI.

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steel

Global steel production and raw materials demand Reflecting the positive outlook for global steel demand, significant new steel making capacity is expected to be constructed over the next two years. With most of the growth in capacity expected to come from integrated blast furnace operations, the outlook for iron ore and metallurgical coal demand remains positive.

China’s changing steel making industry Sustained high rates of economic growth and rising production of steel intensive manufactured goods have resulted in Chinese crude steel production rising by 138 per cent between 1994 and 2003, to reach 220 million tonnes. However, reflecting the rapid development of China’s steel industry a significant proportion of this growth has occurred in small scale, outdated and often inefficient facilities. There are estimated to be approximately 1500 steel producers in China. However, only fifteen mills have annual output greater than 5 million tonnes and a further eleven mills have annual output of 3–5 million tonnes. Furthermore, across the group of medium to large producers, a relatively small number of producers account for a large share of profits. For example, according to the Chinese Iron and Steel Association, in the first half of 2005, 68 large and medium sized enterprises reported earning US$6.1 billion in profits. However, the top ten producers accounted for 68 per cent of the total. Reflecting concerns about overinvestment in capacity, low product quality, declining domestic steel prices and increased levels of pollution, Chinese authorities have sought to implement a number of policies aimed at rationalising the Chinese steel industry around fewer, larger scale steel makers. A specific goal of the current Development Policy for the Steel Industry is for the largest ten steel mills in China to account for 50 per cent of total output by 2010, and 70 per cent by 2020. Quite explicitly the intention is to encourage the expansion and consolidation of large firms to achieve economies of scale, while reducing the number of small scale producers. With the introduction of a range of initiatives in the steel industry since early 2004, a higher proportion of China’s total steel production is now produced in larger scale mills. In 2003, only two steel mills produced over 10 million tonnes. In 2005, eight steel mills produced more than 10 million tonnes, with the largest, Shanghai Baosteel producing almost 23 million tonnes. Furthermore, it is not only the size of the mills, but the technologies that they employ that are having a significant impact on the profitability of China’s steel industry. For example,

Chinese steel industry policy initiatives April 2004 June 2004 June 2004 Late 2004 May 2005 May 2005 July 2005 August 2005

120

Slowed bank lending to industries that used steel products intensively Increased equity required to match new fixed asset borrowing for new steel making capacity Forced closure of small scale blast furnaces and announced timetable for the closure of larger (though still comparatively small) operations Limits placed on the development of new capacity aimed at the production of low value long products Reduced export rebates on steel exports Reduced the number of companies allowed to purchase iron ore on the spot market Development Policy for the Steel Industry announced Formation of Anben Iron and Steel Group through the merger of Anshan Iron and Steel Group and Benxi Iron and Steel — capacity 20 million tonnes a year

australian commodities > vol. 13 no. 1 > march quarter 2006

steel Shanghai Baosteel’s water consumption per tonne of hot metal produced is estimated to have declined to 3.7 cubic metres. This is significantly lower than many other domestic mills (that consume around 10 cubic metres per tonne of hot metal) and is close to world best practice standards. Most importantly, developments in China will continue to have a significant impact on global steel and steel making raw materials markets. Over the period to 2011, China is expected to account for around 61 per cent of the forecast growth in global steel output. However, with domestic requirements expected to continue to grow strongly (discussed earlier), China’s net imports of iron ore and metallurgical coal are forecast to rise over the outlook period. In particular, China is projected to account for 77 per cent of the growth in global seaborne iron ore trade from 2005 to 2011.

Steel production elsewhere North America

Over the medium term, higher production costs, the removal of trade barriers and an assumed appreciation of the US dollar is forecast to erode the competitiveness of the US steel industry. As a result, the forecast growth in US steel consumption is expected to be met mainly by an increase in imports. Furthermore, as the United States produces around half of its total steel output in electric arc furnaces, rising energy prices and sustained high scrap steel prices are expected to result in the raw material cost of producing steel in EAF mills remaining above that of their integrated counterparts (despite historically high iron ore and metallurgical coal prices). As the United States is a significant exporter of metallurgical coal, higher blast furnace output is also expected to contribute to a reduction in the availability of metallurgical coal for export. Japan

In 2005, Japan remained the world’s largest exporter of steel, with total steel exports of 33 million tonnes, 85 per cent of which were destined for Asia. However, over the outlook period, a number of countries that have traditionally imported steel from Japan are anticipated to invest in new steel production capacity (notably China and Thailand) that will reduce their import requirements. Reflecting this situation, steel production in Japan is expected to remain relatively flat and is projected to reach 115 million tonnes in 2011. India

Steel production in India is projected to grow relatively strongly over the outlook period. The key drivers behind this trend include: strong growth in industrial activity; proximity to the rapidly expanding Chinese market; and large reserves of domestic iron ore. In addition to this, the Indian Government has announced ambitious plans to increase crude steel production capacity to 66 million tonnes in 2011 and 100 million tonnes in 2020. Among the increases to supply will be Tata Iron and Steel (1 million tonnes a year – late 2005; a further 2.4 million tonnes a year – 2008-09); Jindal Steel (1 million tonnes a year – March 2006); and Vizag Steel (1.5 million tonnes – early 2008). Potential new developments include Veranda resources proposed US$4.5 billion steel and iron ore complex, and BHP Billiton and POSCO’s planned US$8.4 billion, 10 million tonne a year joint venture integrated steel complex — both located in Orissa. Bhushan Steel is also planning construction of a new US$690 million steel plant in Orissa, with 1.5 million tonnes of capacity due on line in the next three years.

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iron ore With the majority of the growth in steel production in India set to come from blast furnace operations, India is expected to become a significant consumer of steel making raw materials. While India has reserves of coking coal, they are generally of inferior quality compared with internationally traded coals. As a result, imports from Australia are expected to account for the majority of the forecast increase in India’s use of metallurgical coal. In contrast, India has substantial reserves of good quality iron ore, which are expected to be sufficient to meet their requirements over the outlook period. Brazil

Supported by strong growth in industrial activity, in addition to large domestic reserves of high grade iron ore, Brazil is forecast to substantially increase its production of crude steel by 20 million tonnes to over 52 million tonnes by 2011. Underpinning this outlook is the assumption that CVRD and Shanghai Baosteel will proceed with the construction of a 3.7 million tonnes a year integrated steel mill in Sao Luis, with a further expansion to 7 million tonnes a year capacity likely in the medium term. Higher blast furnace output is also forecast to come from the current construction of CST’s no. 3 blast furnace at Serra (2.5 million tonnes) due on line in 2006. Other increases include the potential doubling of capacity at Arcelor’s SA Joao Monlevade and Juiz e Fora plants, with capacity forecast to increase by 2.2 million tonnes. A further 4.4 million tonnes of slab may be sourced from the CVRD, and Thyssen Krupp owned, CSA steel plant in Sepetiba in 2008.

Steel making raw material supply Over the outlook period Australia is projected to increase its share of world seaborne iron ore and metallurgical coal trade as a result of the development of new mine supply and port handling capacity, and Australia’s proximity to the rapidly expanding Asian markets.

Iron ore Australia

Over the outlook period, significant new additions to mine, rail and port capacity are projected for Australia. In 2006, Rio Tinto successfully completed commissioning of the recently expanded port at Parker Point (near Dampier) from its current handling capacity of 74 million tonnes a year to 116 million tonnes a year. The mine capacity required to feed the port has been progressively commissioned throughout 2005, including a 12 million tonnes a year expansion of its Yandicoogina mine and the newly commissioned 10 million tonnes a year capacity Eastern Ranges mine as they ramp up toward full capacity. These developments are expected to be further complemented by the 15 million tonnes a year expansion of the Tom Price, Marandoo and Nummuldi mines expected in mid-2006. Over the longer term, Rio Tinto is expected to further increase its capacity following its announced intention to expand the Yandicoogina mine by a further 16 million tonnes a year to reach 52 million tonnes from late 2007. Capacity at Dampier port is also expected to increase by a further 24 million tonnes to reach a total capacity of 140 million tonnes in late 2007. Another possible development includes the expansion of Robe River’s Cape Lambert port by 14–19 million tonnes a year, to reach 69 million tonnes a year in early 2007. When completed, Rio Tinto’s export capacity from the Pilbara region is expected to be approximately 200 million tonnes.

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iron ore BHP Billiton is also expected to significantly increase its iron ore supply capacity in the Pilbara. In late 2006, the construction of a new Brockman resource, Orebody 18, and an additional car dumping facility will add a further 8 million tonnes a year capacity, taking capacity to 118 million tonnes a year. BHP Billiton is also expected to proceed with its US$1.3 billion Western Australian iron ore growth project 3 in Area C, which will increase capacity by a further 20 million tonnes from late 2007. Future possible BHP Billiton plans include increases in production capacity at its Newman mine sites (Jimblebar, Mount Whaleback and Ore bodies 23 and 25), from a current combined capacity of 45 million tonnes in 2006 to an expanded capacity of 63 million tonnes a year from 2010. These commitments (including rail and port upgrades) constitute a $5.01 billion injection of funds to the Pilbara region in Western Australia and is expected to bring BHP Billiton’s regional output to 152 million tonnes a year by the end of the outlook period. The recent significant rise in iron ore prices and the prospect of continued strong demand growth is also encouraging new entrants to the industry in Australia. A range of projects are at various stages of planning and development, including the potential 25 million tonnes a year Hope Downs operation by Hancock Resources and Rio Tinto, and a 45 million tonnes a year proposed iron ore development by Fortescue Metals Group. On a smaller scale, higher exports are expected from Portman mining following the expansion of its Koolyanobbing mine, which will increase current capacity by 2.8 million tonnes to 8 million tonnes by mid-2006. Murchison Metals (stage 1) production of the Jack Hills hematite lump ore deposit in the midwest of Western Australia and Mount Gibson Iron’s Extension Hill magnetite project are also possible additions to production capacity over the outlook period. Reflecting these supply side developments, Australian iron ore exports are projected to increase by 56 per cent over the outlook period to reach 375 million tonnes by 2011. At that time, Australia is forecast to account for 43 per cent of world seaborne iron ore trade. Australia’s export earnings are projected to rise to over $18 billion (in 2005-06 dollars) by 2007-08, but are expected to fall from that mark (in real terms) for the remainder of the outlook period. Brazil

Despite rising domestic steel production in Brazil, significant expansions from CVRD (the world’s largest iron ore producer), MBR and CSN are projected to underpin a 114 million tonne rise in iron ore exports over the outlook period. In the short term, CVRD is projected to increase its iron ore production to reach in excess of 270 million tonnes a year in 2007. Underpinning this assumption, significantly higher output is expected from the continued expansion of the Carajàs mine where total capacity will be increased by a further 15 million tonnes a year to 85 million tonnes a year in 2006, and 100 million tonnes a year in 2007. The development of the Fabrica Nova mine (15 million tonnes a year capacity) in 2005, and Brucutu mine in 2006, combined with a 14 million tonne expansion of the Fazendao mine and smaller expansions at Alegria and Conceicao mines is also expected to add further combined capacity of around 15 million tonnes a year in 2006. In 2007, CVRD’s production capacity will be increased further by a 9 million tonnes a year expansion of the Brucutu mine. In 2008, MBR — an 85 per cent owned subsidiary of CVRD — is expected (subject to board approval) to increase combined production at its Brazilian operations by 15 million tonnes. The MBR controlled Guaiba Island port facilities are also undergoing an upgrade involving a new shiploader and pier extension. This will increase their loading capacity from 33 million tonnes to 50 million tonnes. australian commodities > vol. 13 no. 1 > march quarter 2006

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metallurgical coal CSN, Brazil’s largest steel producer, has announced intentions to expand capacity at its Casa de Pedra iron ore mine to 45 million tonnes by 2008. This, combined with the possible expansions at CVRD’s Southern Systems, the addition of a further 30 million tonnes of capacity at CVRD’s Carajas mine, and a further 6 million tonne expansion at Brucutu is expected to support strong growth in Brazilian iron ore production over the outlook period. South Africa

The supply of iron ore from South African based Kumba Resources is expected to expand substantially over the outlook period. To facilitate a proposed 11.5 million tonne increase in output from Sishen mine, the railway from Sishen to Saldanha Bay is being upgraded to handle 41 million tonnes by 2009. The bulk of this upgrade (10 of the 11.5 million tonnes), is expected to commence in mid 2007. The agreement between Kumba Resources and Transnet Rail also allows for a possible further expansion to Sishen mine and rail capacity to 58 million tonnes a year. By 2011, Kumba has announced intentions to increase annual production capacity from approximately 32 to 72 million tonnes from its combined Sishen and Thabazimbi mine operations. India

Iron ore production in India in 2006 is expected to fall from 2005 levels as high cost producers in India are bid out of the market by lower cost suppliers such as Australia and Brazil. For the remainder of the outlook period India’s production of iron ore is expected to largely track increases in domestic consumption. This outlook largely reflects the location of India’s iron ore deposits and the lack of suitable transport infrastructure to service easily accessible reserves of iron ore.

Metallurgical coal Australia Solid prices in metallurgical coal markets combined with Australia’s geographic proximity to steel producing nations has led to many new developments and expansions of metallurgical coal mines. The major committed and planned projects are described below. A large number of additional coal mine developments have also been announced, but not committed to, by Australian operators to commence production before 2011. Accordingly there is significant upside potential to Australian production (and exports) over the medium term. BHP Mitsubishi Alliance (BMA) have committed US$176 million to streamlining operations at various locations that will increase Queensland’s coking coal capacity by 2 million tonnes a year over the outlook period. This is in addition to the new Broadmeadow underground mine that began production in August 2005 and is expected to contribute 3 million tonnes to annual supply capacity. White Industries, in a joint venture with Itochu, have commenced operation of the $90 million Ashton underground mine which will produce 3 million tonnes of thermal and coking coal combined from 2006. Yanzhou has committed to redevelop the Austar underground (formerly Southland) metallurgical coal mine in New South Wales. The mine will produce 2.5–3.0 million tonnes a year over the outlook period. Resource Pacific Holdings have plans to expand and upgrade their Newpac longwall operations. The $75 million expenditure will increase coking coal production by 4 million tonnes from 2007. 124

australian commodities > vol. 13 no. 1 > march quarter 2006

metallurgical coal AMCI’s Carborough Downs metallurgical coal development is set to start production this year with an estimated 58 million tonnes to be mined over the next fourteen years at rates between 1.5 and 4 million tonnes a year. Capacity at Excel Coal’s Wambo open cut and underground mining operations are set to ramp up during 2006. The combined capacity of the thermal and metallurgical coal mines will rise by 6.3 million tonnes a year. Further additions to Australian coking coal supplies will be sourced from Anglo Coal’s Grasstree development and the Rio Tinto operated Hail Creek mine, which will add 3.9 million tonnes and 2.5 million tonnes a year to capacity respectively. Anglo Coal’s venture

Outlook for world iron ore and metallurgical coal trade 2004

2005

2006

2007

2008

2009

2010

2011

EU 25 Asia – Japan – China – Korea, Rep. of – Taiwan Other Asia Rest of the World

142

139

148

144

147

143

143

141

135 208 44 16 7 44

133 275 44 15 10 42

138 306 46 16 13 51

138 347 46 15 15 60

140 381 47 16 17 66

139 398 46 15 19 68

140 420 47 15 22 70

141 448 48 14 22 69

World seaborne imports

596

659

717

765

814

829

857

882

Australia Brazil India Canada South Africa Sweden Others

210 203 68 27 24 16 48

241 220 80 27 26 17 48

285 260 57 27 27 17 44

321 273 58 28 31 18 37

341 293 57 29 35 19 41

354 298 54 29 38 18 39

366 307 56 29 39 19 41

375 317 58 29 40 20 44

World seaborne exports

596

659

717

765

814

829

857

882

67.0 8.2 18.5 15.0 6.8 57.8 16.4 1.7 15.4

67.3 8.6 18.3 17.8 7.2 59.5 15.8 2.7 18.4

67.1 8.7 18.8 20.1 10.8 59.6 20.0 2.1 20.7

66.3 8.8 20.0 23.1 12.5 60.2 24.5 2.3 20.6

66.8 8.7 20.3 26.5 14.5 59.5 26.2 2.5 20.1

67.0 8.6 20.9 28.9 15.0 59.0 27.5 3.3 20.0

67.2 8.7 21.7 31.5 16.8 59.5 29.0 3.8 20.3

67.5 8.8 21.8 33.9 16.9 59.4 31.1 3.6 20.2

206.8

216.4

228.8

238.6

245.1

250.2

258.5

263.2

Australia Canada United States China Russia Other

116.5 23.5 24.3 5.69 12.9 23.9

124.9 27.8 26.0 5.26 9.5 22.9

133.6 32.6 22.6 4.95 11.3 23.7

140.1 34.5 21.5 4.8 13.9 23.8

146.5 35.7 20.3 4.6 14.1 23.9

154.3 36.1 16.7 4.4 14.5 24.2

161.4 36.5 16.3 4.2 15.5 24.6

164.7 37.1 15.9 4 16.1 25.4

World seaborne exports

206.8

216.4

228.8

238.6

245.1

250.2

258.5

263.2

Iron ore imports

Iron ore exports

Metallurgical coal imports Japan Taiwan Korea, Rep. of India China EU 25 Brazil Other Asia Other World seaborne imports

Metallurgical coal exports

australian commodities > vol. 13 no. 1 > march quarter 2006

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metallurgical coal with Japan’s Mitsui Corporation at the new Lake Lindsay opencut mine will add 3.7 million tonnes of coking coal a year from 2007. Smaller coking coal projects slated to begin production over the outlook period include the AMCI Holdings and Aquila Resources joint venture Isaac Plains in Queensland. Output from the mine is expected to add 1 million tonnes a year from the third quarter of 2006, with the potential to rise to 2.6 million tonnes a year by 2009. Canada

In response to robust growth in forecast demand for metallurgical coal and a positive price outlook, new mine developments will serve to increase Canada’s export volumes over the outlook period. Northern Energy and Mining Inc’s (NEMI) recently completed feasibility study of the Trend coal deposits located in northeast British Columbia indicate the potential for at least ten years of up to 2 million tonnes a year output of metallurgical coal. Production is due to ramp up from mid-2006 to reach full production by late 2007. Increased use of PCI coals in the steel making process has underpinned the development of the 2 million tonnes a year Willow Creek coal project. This project encompasses Willow Creek and Pine Pass mining areas, producing 65 per cent and 35 per cent PCI coal respectively. Possible production expansions include a development in Cape Breton, Nova Scotia. The proposed coal mine is to be developed by an Xstrata led joint venture and to produce between 3.5 and 5 million tonnes a year, of which previous estimates have indicated that 20–30 per cent is metallurgical coal. Other possible developments in Canadian coking coal include WCCC’s Wolverine project, Cline Mining Corp’s Lossan and Lodgepole projects, Hillsborough Resources Ltd’s Bingay Creek project, and Fortune Minerals Ltd’s Mount Klapan project. Development of many of these projects depends on continued strong metallurgical coal prices, as Canadian coal exporters are not as price competitive on the world market as Australian producers. Projected weaker prices may cause these projects to be delayed until they are more financially viable. A shortage of mining equipment is also acting to limit metallurgical coal production in Canada. Production in 2006 from Elk Valley (the world’s second largest exporter of metallurgical coal) will be less than previously anticipated due to a tyre shortage. The shortage, which is expected to run into 2007, is likely to reduce production to 24 million tonnes, down from 28 million tonnes in 2005. United States

High prices for sulfur credits in the United States — credit prices increased from US$300 in late 2005 to US$1500 in 2006 — is having an impact on US production of coking coals. As credit prices have increased, returns to low sulphur thermal coals have improved, encouraging producers to switch production capacity out of metallurgical coals. As a result, some reduction is expected in the quantity of metallurgical coal available for export from the United States. US metallurgical coal exports to Asia in 2007 are expected to return to below 1 million tonnes from the recent high of more than 5 million tonnes in 2005. This situation is being further exacerbated by delays in the supply of new desulfurisation kits that will aid steel producers in meeting new low sulfur emission targets. Forecasting the extent of the impact of this situation is difficult and it is unclear how long delays will continue in the supply of desulfurisation equipment. However, in the short term, US coal producers are likely

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metallurgical coal to continue to switch production to low sulphur content (thermal) coals, thus reducing the supply of metallurgical coal for export. Russian Federation

The Kuznetsk basin produced a record 160 million tonnes of coal in 2005, accounting for 83 per cent of Russia’s coking coal. Investment in the region in 2005 reached US$1.1 billion, with investment in 2006 expected to rise to US$1.2 billion, of which US$357 million is earmarked for new mine development. Russian coking coal exports are also likely to be buoyed by the continuation of the long term contract supplying Yakutugol’s K9 Neryungrinsky coking coal out of the Saha Republic to seven Japanese customers. The previous contract that ran from JFY 2001-02 to 2005-06 resulted in a total of 2.75 million tonnes being exported to Japan. The new contract maintains these export levels to 2010 amid earlier Russian concerns that the contract, if maintained, would be at significantly lower levels. China

In China the market for hard coking coal is set to ease in 2006 as the rate of steel production growth slows from previous years and substantial additions to capacity come on line. There is currently an oversupply of semisoft coking coals in China. Growth in hard coking coal output will be sourced from new mining operations in Shanxi. The Zhaozhuang mine came on line at the end of 2005, and both Sima and Tunliu mines are expected to become operational early in 2006. These three mines will add 15 million tonnes of hard coal production capacity to the region in the short term. Complementing this increase in regional capacity is the further 10 million tonnes a year upgrade of the Houyue dedicated coal rail link; this is in addition to the 50 million tonnes a year upgrade carried out in 2005.

Australian steel and steel making raw materials outlook Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

Mt Mt Mt

9.47 221.5 114.4

7.56 252.3 127.7

7.97 278.5 130.5

8.21 311.0 138.1

8.61 340.6 145.1

8.71 354.1 154.5

8.75 367.6 158.3

8.78 379.5 164.2

Exports Iron and steel as Nominal value Real value b

Mt A$m A$m

3.82 2 004 2 113

2.34 2 031 2 091

2.38 1 640 1 640

2.78 1 723 1 681

3.21 1 675 1 595

3.29 1 512 1 404

3.31 1 603 1 452

3.26 1 656 1 463

Iron ore Nominal value Real value b

Mt A$m A$m

194.8 5 277 5 565

228.5 8 120 8 360

269.6 14 279 14 279

306.1 18 026 17 587

330.6 18 939 18 027

345.8 18 672 17 339

356.7 18 640 16 887

366.4 18 845 16 656

Metallurgical coal Nominal value Real value b

Mt A$m A$m

111.7 6 510 6 866

124.9 10 758 11 076

127.5 17 687 17 687

135.1 16 698 16 291

142.1 15 574 14 824

151.5 16 811 15 611

155.3 16 956 15 361

161.2 16 722 14 780

Australia Production Iron and steel s Iron ore Metallurgical coal

a Includes all steel items in ABS, Australian Harmonized Export Commodity Classification, chapter 72, ‘Iron and steel’, excluding ferrous waste and scrap and ferroalloys. b In 2005-06 Australian dollars. f ABARE forecast. s ABARE estimate. z ABARE projection. Sources: International Iron and Steel Institute; Coal Services Australia; Queensland Coal Board; United Nations Conference on Trade and Development; ABARE.

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nickel Other developments

Australia’s position as the major source of China’s coking coal could come under pressure from developments in Mongolia over the medium to longer term. Currently, almost all of Mongolia’s coking coal production (approximately 2 million tonnes a year) is exported to China. Mongolia’s central administration has announced reforms encompassing all local coal operations to consolidate the industry, increase plant size and improve the efficiency of coal production. Among others, the measures proposed include reducing the number of coal mines from 1310 in 2005 to 500 by 2010, and having 90 per cent of operations automated by 2010. Preliminary estimates of a site at Tavan Tolgoi indicate a potential supply capacity of metallurgical coal of 7 million tonnes a year, for thirty years. Polish metallurgical coal producers Jastrzebska are expected to have 3 million tonnes of coking coal available for export in 2006. This constitutes a significant rise from the estimated 1.65 million tonnes exported in 2005 and will serve to increase coking coal supply in Europe in the short term. The German Government has stipulated that there will be no change to their coal subsidy package to 2008 leaving estimated coal production levels relatively unchanged in the short term. From 2009, however, the package is no longer legally binding and planned aid reductions could see production fall to 16 million tonnes in 2012 from the estimated 26 million tonnes produced in 2005. Without countervailing increases in other European coking coal producing nations, this will severely tighten European supply toward the end of the outlook period.

Nickel The lead time required to develop new mine and concentrate production capacity is expected to constrain nickel supply growth prior to 2008. This constraint, coupled with moderate demand growth, is expected to keep nickel prices well above their long term average during the first half of the outlook period. High prices will also continue to provide an incentive for steel mills to increase production of lower nickel content stainless steels as well as increase the use of nickel from scrap. As a result, both nickel supply and demand are forecast to increase only moderately in the period to 2008. Beyond 2008, the addition of significant new mine supply and nickel production capacity is forecast to result in a rebuilding of world nickel stocks and a significantly weaker outlook for world nickel prices (in real terms).

World nickel

Prices to ease over the medium term

Real price

12

20 Stocks

15

9

10

6

5

3

2006

weeks of world consumption

US$’000/t 1985 128

1990

1995

2000

2005

2011

Continued slow growth in nickel supply and strong demand from stainless steel producers resulted in world nickel prices reaching a high of US$17 725 per tonne in May 2005. Despite weakening over the second half of 2005, prices remained sufficiently high to average around US$14 750 a tonne for the entire year, over 6 per cent higher than in 2004. While a rebound in stainless steel production is expected to maintain strong demand for nickel in 2006, supply growth is expected to be sufficient to result in year average world nickel prices easing to US$13 700 a tonne. While weaker than in 2005, world prices (in both real and nominal australian commodities > vol. 13 no. 1 > march quarter 2006

nickel terms) will remain significantly above the average for the past ten years. In 2007, continued growth in supply is projected to result in world prices falling by a further 9 per cent to around US$12 500 a tonne. Beyond 2007, as the major nickel lateritie projects begin to come on line, supply is forecast to increase significantly. As a result, world nickel prices in real terms (2006 dollars) are forecast to fall to around US$7300 a tonne in 2011, 46 per cent lower than in 2006. The extent to which forecast supply exceeds consumption over the medium term is reflected in stock levels. Year end world nickel stocks in 2005 are estimated to have been at around 4.4 weeks of world consumption. While stocks are expected to stay close to this level in 2006 and 2007 — at 4.4 and 5.0 weeks respectively, the addition of considerable new mine capacity beyond 2007 and 2008 will help to rebuild world nickel stocks. By 2011, world year end nickel stocks are projected to be 6.7 weeks of world consumption, 52 per cent higher than in 2006.

Stainless steels

Stainless steel production drives demand for nickel As stainless steel production accounts for over 65 per cent of total world nickel consumption, the outlook for nickel demand is directly linked to developments in world stainless markets. In addition to the total amount of stainless steel produced, the grade of the steel and the proportion of nickel sourced from scrap will be important in determining the quantity of primary nickel used in stainless steel production over the outlook period. Over the past two decades, the average western world austenitic ratio (the proportion of stainless steel that contains nickel) has been around 77 per cent. However, the limited availability of primary nickel and high world nickel prices has supported growth in the production of both the 200 and 400 series steels (relative to the 300 series), as well as an increase in the utilisation of nickel from scrap stainless steel. As a result of these trends, the austenitic ratio is estimated to have fallen from around 77 per cent in 2003 to 75 per cent in 2005. China is forecast to account for the majority of the growth in world stainless steel consumption and production over the

Stainless steels are a group of corrosion resistant steels that contain at least 10 per cent chromium and other alloying elements such as nickel and manganese. The 300 series has the largest market share and contains around 8–12 per cent nickel. The high nickel content of the 300 series imparts superior thermal resistance properties to the steel. These steels tend to be used mainly in manufacturing and industrial applications, such as food preparation equipment, oil refining, power generation and the petrochemicals production. The 200 series stainless steels contain a high level of manganese and only around 1–5 per cent nickel. The 200 series steels tend to cost less than 300 series steels, but generally have inferior corrosion and thermal resistance properties and poorer surface appearance. As a result, the use of 200 series stainless steel is concentrated in the construction industries. The 400 series stainless steels contain no nickel but have higher chromium content. These steels tend to have superior corrosion resistance properties compared with the other series and are used mainly in automotive exhaust systems.

Nickel used in stainless steel

Stainless steel production Austenitic stainless steel Austentic ratio Nickel content of stainless steel Nickel content of stainless steel Source of nickel – primary nickel – secondary nickel (scrap) – scrap ratio Non-stainless nickel use Total primary nickel consumption

2003

2004

2005

2006

2007

2008

2009

2010

2011

Mt Mt % % kt

22.6 17.4 77.0 8.53 1 484

24.6 18.7 75.9 8.41 1 569

24.6 18.3 74.7 8.30 1 522

26.0 19.4 74.7 8.32 1 616

27.1 20.2 74.7 8.30 1 680

28.7 21.5 74.8 8.37 1 797

30.5 23.0 75.3 8.42 1 934

31.3 23.8 76.0 8.45 2 010

32.7 24.9 76.2 8.42 2 098

kt kt % kt

836 649 43.7 397

861 708 45.1 403

836 686 45.1 439

890 726 44.9 451

926 754 44.9 470

997 800 44.5 494

1 067 866 44.8 515

1 108 903 44.9 529

1 152 946 45.1 548

kt

1 233

1 265

1 275

1 341

1 390

1 491

1 582

1 637

1 700

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129

nickel outlook period, and will have a significant impact on trends in the world austenitic ratio over the medium term. In 2006 and 2007, the continuation of a tight demand–supply situation — and resulting high nickel prices — is expected to keep the world austenitic ratio below 75 per cent in both years. Further expansion of market share for the 200 series stainless is expected to be relatively limited (especially in China), and hence growth in production of 400 series is expected to be the main factor in keeping the world austenitic ratio below its long term average. Beyond 2007, increased Chinese production of 300 series relative to lower nickel content steels is forecast to result in the world austenitic ratio rising. The relative expansion in Chinese production of 300 series is assumed to reflect the relatively stronger growth in sectors of the economy where this type of stainless steel is used more intensively, such as in manufacturing and industrial applications such as petrochemicals. Limits to further substitution in areas such as construction, and the growing awareness of the most appropriate types of stainless steel for certain applications (especially in the petrochemical industry) are also assumed to support higher relative consumption and production of 300 series steels in China and worldwide. Overall, the world austenitic ratio is forecast to return to around 76 per cent by 2011.

China to dominate stainless steel consumption Strong growth in China’s industrial, manufacturing and construction sectors, particularly in the coastal regions, has underpinned a doubling of China’s stainless steel consumption in the past four years. China is now the world’s largest consumer of stainless steel, having overtaken the United States in 2001. China is expected to contribute over 55 per cent of the foreChina – incomes and stainless steel consumption cast growth in world consumption of stainless steel over the outlook period. Stainless steel consumption Continued strong growth in demand for stainless steel from 4 8000 the construction and industrial sectors is expected in China, in line with assumed strong economic growth. Chinese demand 3 6000 for stainless steel based durable goods such as cooking utenUrban income sils and household appliances is also expected to increase as 2 4000 economic growth leads to higher disposable incomes. Combined with the rapid growth in demand, the relatively 1 2000 Rural income slower expansion of China’s domestic stainless steel produc2002 tion has resulted in a significant increase in Chinese stainless yuan/ person Mt steel imports, especially since 2000. Looking forward, this 1986 1992 1998 2004 situation is expected to change dramatically, reflecting the large number of new projects that are at various stages of planning and development. In 2006, China’s stainless steel production capacity is expected to be significantly bolstered by the expansion of Tiyuan Steel’s plant in Shanxi province to 1.5 million tonnes a year capacity. This development is expected to be complemented by the opening of Shanghai Boasteel’s second 750 000 tonnes a year stainless steel line (in mid-2005), as it ramps up toward full capacity. Reflecting these developments, China’s stainless steel output is expected to reach 5.1 million tonnes in 2006, more than double the 2004 level. In 2007, three more lines, one each by ZPSS, Tangshan and Lisco (each of 500 000 tonnes a year), are expected to be commissioned and are forecast to support China’s stainless steel production rising by a further 2.8 million tonnes to 7.9 million tonnes. In 2008 and beyond, further expansion to existing capacity, especially by Tangshan and Lisco is forecast to support significant additional increases. In 2011, Chinese stainless steel 130

australian commodities > vol. 13 no. 1 > march quarter 2006

nickel capacity is projected to reach 11 million tonnes — approximately 8 million tonnes higher than in 2005. A major proportion of the increase in Chinese production of stainless steel is expected to be 300 series, for use in the rapidly expanding manufacturing and industrial sectors. The production of 400 series stainless steel is technically complex and requires a high level of experience and skill. Over the longer term, Chinese production of high quality stainless steel — including the 400 series — would be expected to increase as the industry matures and continues to build the required skill base. Nethertheless, over the outlook period to 2011, much of the higher quality stainless steel consumed in China are expected to be imported. The rapid industrialisation of the Chinese economy since 2000 shares a number of parallels with the emergence of Japan after the late 1950s. Between 1960 and 1974, Japanese industrial production growth averaged 11 per cent a year. A combination of rising domestic incomes and strong growth in metals intensive manufactured exports supported strong growth in the demand for, and production of stainless steels and other high nickel containing alloys. Over this period, Japan’s nickel consumption rose by an average of 15 per cent a year, to reach 90 000 tonnes. In China, strong growth in manufactured exports and related infrastructure from 2000 to 2005 has contributed significantly to China’s industrial production growing by an average of 14 per cent a year. Over the same period, nickel consumption grew by an average of 27 per cent a year. With industrial production assumed to grow by around 11 per cent a year over the outlook period, China’s nickel consumption is projected to grow by 19 per cent a year, to reach 578 000 tonnes in 2011, nearly three times consumption in 2004.

Nickel outlook Unit

2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

kt Production kt Consumption kt Stocks – weeks Consumption

1 250 1 253 98 4.1

1 286 1 275 109 4.4

1 346 1 341 114 4.4

1 411 1 390 135 5.0

1 521 1 491 164 5.7

1 596 1 582 178 5.9

1 656 1 637 197 6.3

1 722 1 700 220 6.7

13 838 14 720

14 749 15 192

13 705 13 705

12 489 12 184

9 455 9 044

8 671 8 131

8 465 7 782

8 143 7 339

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

kt kt kt

185 125 110

194 126 115

198 129 113

207 133 111

247 156 107

312 175 104

354 178 106

378 180 109

World

Price LME – nominal – real a

US$/t US$/t

Australia Production – mine bs – refined – intermediate Export volume cs Export value – nominal s – real ds

kt

214

213

215

224

253

277

286

293

A$m A$m

3 090 3 259

3 667 3 775

3 467 3 467

3 367 3 284

3 367 3 205

3 001 2 787

3 232 2 928

3 186 2 816

Price – nominal – real d

A$/t A$/t

17 216 18 157

19 915 20 503

18 773 18 773

17 861 17 425

15 762 15 003

12 664 11 759

13 239 11 994

12 781 11 296

a In 2006 US dollars. b Nickel content of domestic mine production. c Includes metal content of ores and concentrates, inter- mediate products and nickel metal. d In 2005-06 Australian dollars. f ABARE forecast. s ABARE estimate. z ABARE projection. Sources: Australian Bureau of Statistics; International Nickel Study Group; London Metal Exchange; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

131

nickel Growth comparison over boom years Industrial production 500 400 300

Japan (starting 1960)

China

200 (starting 2000) 100 index 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Years from beginning of period

Nickel demand 400 300 Japan (starting 1960)

200 100

China (starting 2000)

index 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Years from beginning of period

Outlook in other Asian economies is less positive In recent years, Japan, Korea and Chinese Taipei have supplied around 90 per cent of China’s total stainless steel import requirements. However, as China moves toward increased self sufficiency in stainless steel, its lower import dependence is expected to result in significant excess production capacity in these countries. Evidence from the second half of 2005 suggests that the present focus of major mills in this region (excluding China) has been to support prices by rationing supply. However, this is not a viable longer term strategy. In the future these stainless steel mills (like their counterparts worldwide) appear more likely to seek to exploit any existing comparative advantages that they might have in the technologies they posses and focus on the production of higher quality and 400 series stainless steel. Notably, Korea’s POSCO has recently suggested that it will be trying to further diversify its production away from nickel based stainless steel toward 400 series steel. On balance, the net impact of China’s increasing self sufficiency in the production of stainless steel (especially of higher nickel content) is forecast to result in a gradual slowing of growth in stainless steel production and nickel consumption within Japan, Korea and Chinese Taipei over the medium term.

Growth to ease in north America and Europe

Over the first half of 2005, the combination of strong growth in production and weak demand — in line with slowing industrial production — resulted in a significant buildup of stainless steel inventories in north American and European markets. In response to this buildup and the subsequent weakening of prices, major producers including Arcelor, Outokumptu and Thyssenkrupp implemented sizable production cuts in the second half of 2005. In 2006, the rebuilding of depleted stainless steel inventories, combined with an improving outlook for manufacturing activity, is forecast to result in a rebound in demand and supply of stainless steel in both of these regions. North American production of stainless steel is also expected to be supported by firm demand associated with the reconstruction activity in the Gulf of Mexico region, especially for the petrochemical industry. Beyond 2007 industrial production growth in western Europe is expected to ease. Combined with increased competition from lower cost Asian producers, European stainless steel production is forecast to decline. In north America, growth in stainless steel production is also expected to ease, but remain positive in line with the relatively stable growth in industrial production in the United States.

Nonstainless steel nickel demand to rise strongly While stainless steel will remain the primary end use of nickel over the medium term, slowing growth in this sector will mean that other end uses, especially in high nickel content superalloys, will become increasingly important to the outlook for world nickel markets. Superalloys contain significant amounts of nickel (between 35 and 75 per cent of mass), along with other metals such as chromium, aluminium or iron. Alloys produced from these 132

australian commodities > vol. 13 no. 1 > march quarter 2006

nickel metals can withstand extreme temperatures, maintain structural integrity when exposed to atmospheric changes and withstand elevated stress for prolonged periods. As a result, superalloys are used intensively in aerospace and petrochemical applications. Over the medium term, growth in nonstainless nickel demand is forecast to remain strong. Expansion of China’s and India’s aviation sectors and the ongoing upgrading of aircraft fleets by the world’s major airlines are also expected to be a strong source of growth. In addition to this, a significant expansion in the world petrochemical industry is expected to support growth. The significant rise in oil prices and a desire to lower motor vehicle emissions in many developed countries have supported strong growth in the production of hybrid electrical vehicles. While Toyota was the first to introduce the technology in 1997 with the Prius, technological advancements and higher fuel prices have resulted in other major car manufactures such as Honda and Ford also adding hybrid vehicles to their lines. The production of batteries for these hybrid electrical vehicles is a relatively new source of nickel consumption. Each battery contains up to 16 kilograms of nickel. While largely a niche market at the moment, further strong growth in the production of hybrid vehicles has the potential to add further support to the growth in nonstainless nickel consumption over the medium term.

Supply response to take time Nickel is primarily found in either nickel sulfides or nickel laterite ore bodies. While nickel sulfide ore bodies typically have lower grades and occur at greater depths, which increases mining and extraction costs, they are less mineralogically and chemically complex than nickel laterites. The lower complexity of nickel sulfide ores permits relatively lower cost processing to an intermediate or concenNickel laterites trate form using pyrometallurgy (or traditional smelting) processes. Nickel sulfide ore bodies have accounted for the Nickel laterities account for around 40 per cent of majority of world nickel production in the past fifty years and world nickel production and around 70 per cent of known world reserves. The depletion of major nickel are currently estimated to account for approximately 60 per sulfide ore bodies and increasing reliance on nickel cent of world nickel production. laterities supported a range of projects, especially The slow development of major projects and broader in Australia in the late 1990s, to develop laterities underinvestment in new supply capacity in recent years has ore bodies using hydrometallurgy processes such been reflected in the slow growth of world nickel concenas high pressure acid leaching (HPAL). HPAL uses sulfuric acid at high temperature and pressure within trates supply, which increased by an average 2.5 per cent an autoclave to remove impurities and produce an a year between 2000 and 2005. While supply growth intermediary product from which nickel and cobalt over the medium term to 2011 is forecast to increase in line can be extracted through solvent extraction or elecwith the commissioning of a number of major projects, the trowinning. ability to solve current problems with medium sized nickel Prior to its application in the Western Australian laterite projects, HPAL technology was expected to lateritie projects using HPAL technology will also be critical significantly reduce the cost of mining nickel laterito support supply growth in world nickel markets. ties. However, difficulties have been experienced At present the shortage of refined nickel relative to in the application of HPAL technology in Western demand reflects limited growth in the production of nickel Australia. These experiences, coupled with delays concentrate feed for refining. The commencement of producand capital expenditure blowouts at other major lateritie projects, such as the Inco’s Goro project in tion (in late 2005) at Inco’s 50 000 tonnes a year Voisey New Caledonia (under development since 1993), Bay complex in Canada is expected to ease this shortage have contributed significantly to a cautious position and facilitate higher production of refined nickel in 2006. being taken on nickel laterite projects and raised While this operation is only expected to produce (lower concerns over a potential global shortage of nickel cost) replacement feed for Inco’s Sudbury and Thompson concentrates. refineries, the subsequent diversion of their existing feed australian commodities > vol. 13 no. 1 > march quarter 2006

133

nickel supplies onto international markets should assist in reducing bottlenecks in refineries elsewhere in the world. Combined with higher capacity utilisation rates at existing mines, the ramping up of recently commissioned projects is expected to result in world mine production rising by 5 per cent to 1.39 million tonnes in 2006. In 2007, world mine production is expected to rise by a further 6 per cent to 1.48 million tonnes supported by the expected commencement of production at BHP’s Billiton Ravensthorpe project in Australia (50 000 tonnes a year) and Inco’s Goro project in New Caledonia (60 000 tonnes a year). Over the remainder of the projection period the expected commissioning of Falconbridge’s Koniambo project in New Caledonia (60000 tonnes a year) and CVRD’s Niquel do Vermelho (46 000 tonnes a year) and Onca Puma projects (60 000 tonnes a year in its first phase, 140 000 after the second stage), both located in Brazil is projected to result in world mine production reaching 1.79 million tonnes in 2011. As these few large projects are expected to account for most of the growth in world nickel production over the medium term, any delay in their implementation has the potential to significantly constrain supply growth over the projection period. The takeover of Falconbridge by Inco has also resulted in an increased likelihood of further delays in the current development timetable of the Koniambo mine project (expected to be approved but with a current startup date of 2009 or 2010). While technical problems with the application of HPAL technology are expected to continue, possible shortages of skilled labor and mining equipment may also cause project delays. Relatively slow growth in mine supply constrained production of refined nickel in 2005 to 1.29 million tonnes, only 3 per cent higher than in 2004. In 2006, world nickel production is expected to increase by nearly 5 per cent to 1.35 million tonnes. Continued increases in existing capacity utilisation and the ramping up of production at various projects — including Jichuan in China; the Doniambo smelter in New Caledonia; and the Rio Tuba smelter in the Philippines — and the construction of a new ferronickel smelter (capacity of 14 600 tonnes) at PT Aneka Tambang’s operation in Indonesia are expected to contribute to the higher output of refined nickel in 2006. After rising by 5 per cent to 1.41 million tonnes in 2007, the significant growth of mine supply is forecast to result in refined production rising a further 8 per cent to 1.52 million

Major nickel laterite projects expected to be commissioned over the outlook period country

company

expected startup

capacity

expansion type

kt Project name Goro

New Caledonia

Inco

late 2007

60

greenfield

Vermelho

Brazil

CVRD

late 2008

46

greenfield

Ravensthorpe

Australia

BHP Biliton

mid 2007

50

greenfield

Koniambo

New Caledonia

Inco

2009

60

greenfield

Moa Bay

Cuba

Sherritt / Cubaniquel

2007–08

16

brownfield

Doniambo

New Caledonia

Eramet

2005–08

8

brownfield

ex - Moa Bay operations

Cuba

Cubaniquel

2006–10

8

brownfield

Coral Bay - Rio Tuba

Philippines

Sumitomo MM

2005–06

4

brownfield

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australian commodities > vol. 13 no. 1 > march quarter 2006

nickel tonnes in 2008. Over the remainder of the medium term production growth is forecast to average around 4 per cent a year to reach 1.72 million tonnes by 2011.

Australian production and exports After falling by an estimated 5 per cent in 2005-06, weaker world nickel prices are expected to result in Australian export returns declining by a further 3 per cent to $3.4 billion in 200607. Higher metal output is expected to be supported by steady increases in production at Minera’ Resources Murrin Murrin operation in Western Australia and at BHP Billiton’s Yabulu plant in Queensland and the Kwinana refinery in Western Australia. Combined with higher capacity utilisation rates at existing operations in response to high nickel prices, the continued ramping up of production at the Mincor Resources Mariners mine and LionOre’s Maggie Hays nickel mine is expected to be the main sources of mine supply growth in 2006. However, increased production from these new projects is expected to be partially offset by the closure of the Tectonic Rav8 mine (late 2005) and the expected closure of LionOre’s Emily Anne mine (early 2006). Over the remainder of the medium term, Australian nickel export returns are forecast to decline at an average rate of 3.8 per cent a year to reach $2.8 billion (in 2005-06 dollars) in 2010-11. Growth in export volumes will become increasingly important for export revenues over the medium term, to compensate for weakening world nickel prices. The main source of growth in metal production is expected to be from the 45 000 tonnes a year expansion to BHP Billition’s Yabulu refinery, which is expected to come on line in mid-2007. The gradual ramping up of production at Murrin Murrin to its nominal operating capacity of 40 000 tonnes is also expected to make a positive contribution to growth. In 2006-07, Australian production of nickel is expected to increase by 3 per cent to 133 000 tonnes. By 2010-11, Australian refined nickel production is forecast to be 180 000 tonnes, representing average growth over the projection period of around 6 per cent a year. After rising by an estimated 2 per cent in 2005-06 to 198 000 tonnes, Australian mine supply is forecast to increase by around 5 per cent to 207 000 tonnes in 2006-07. Growth in mine supply from the commissioning of a number of smaller projects, including the expansion of Black Swan, Flying Fox / Forrestania (stage 1) and Avebury, is forecast to be the main source of this increase. Over the remainder of the medium term, growth in Australian mine supply is forecast to increase by an average of around 16 per cent a year to reach 378 000 tonnes in 2010-11. Over this period, growth is forecast to be primarily sourced from the ramping up of production at Ravensthorpe–Forrestania (stage 2), Sherlock Bay and Prospero, which are expected to commence production in 2007-08. Beyond 2007-08 the opening of Honeymoon Well and the Gladstone Nickel project and possibly the Mount Keith and Kagoorile Nickel projects are expected to support growth in mine production.

australian commodities > vol. 13 no. 1 > march quarter 2006

135

contents gold

> William Mollard > Contact> +61 > +61 2 6272 2 6272 2096 ???? > >[email protected] [email protected]

gold outlook to 2011 investment demand to support prices in 2006 William Mollard

> Continued strength in investment demand and support from a number of fundamental factors is expected to lead to an increase in the price of gold in 2006. > Australian gold mine production is forecast to increase for much of the outlook period as a number of operations commence production in response to an increase in Australian dollar gold prices.

Gold price increases in all currencies in 2005 The US dollar denominated gold price averaged US$445 an ounce in 2005, 9 per cent higher than the average price in 2004 of US$409 an ounce. The gold price, when denominated in other major international currencies, also increased in 2005 and provides an indication of the importance of factors other than movement in the US dollar. For example, the rand, euro and Australian dollar gold prices increased by 30 per cent, 35 per cent and 26 per cent respectively in 2005. Movements in world oil prices and the associated concerns over the possible implications for inflation increased investment demand for gold and had a strong influence on world gold prices, particularly in the latter part of 2005. A number of other factors also supported the gold price in 2005. These included indications that the central banks of the Russian Federation and South Africa were considering increasing their gold holdings, ongoing geopolitical tensions, continued subdued growth in world mine production and an increase in fabrication demand in India, the Middle East and China.

Gold prices

Gold price to increase further in 2006

Daily, ended 3 February 2006

140 130 120 Rand

110

A$ Euro

100

US$

90 index Jan

136

Mar

May

July 2005

Sep

Nov

Jan

After rising strongly in late 2005, the gold price continued to increase in the initial part of 2006, exceeding US$560 a tonne in early February, largely reflecting ongoing strength in investment demand. For 2006 as a whole, investment demand for gold is expected to continue to be supported by a number of factors, including: individuals purchasing gold as a hedge against a potential increase in global inflation (driven by high and volatile world oil prices); ongoing concerns about the large US current account deficit (and the potential impact on the US dollar); uncertainty over Iran’s nuclear program and the potential implications for global oil prices; the possibility of terrorist activity; and continued speculation about potential gold purchases by central banks. australian commodities

> vol. 13 no. 1 > march quarter 2006

gold A substantial recent increase in the prices of minerals and energy commodities has also increased interest in the role of gold and other minerals and energy commodities in asset diversification. In addition, the increasing role of exchange traded funds and other vehicles for investing in gold has also increased the ease with which individuals can invest in gold. Gold exchange traded funds are traded on the major international stock exchanges and are fully backed by gold which is both deposited and insured. Exchange traded funds essentially provide investors with the ability to invest in physical gold without the need to personally store the physical bars. The potential for escalation in the current dispute over Iran recommencing its nuclear program represents an upside risk to the gold price forecast. In early 2006, Iran removed International Atomic Energy Agency (IAEA) seals from its main uranium enrichment facility, with the purpose of resuming uranium enrichment research. In early February the IAEA voted to refer the Iranian nuclear issue to the UN Security Council. A disruption to Iran’s exports of crude oil —particularly given Iran is the second largest producer of oil in the Middle East — could potentially result in an increase in crude oil prices, an outcome that would be supportive of the gold price. A number of fundamental factors in the gold market are also expected to support the gold price in 2006. While mine production is forecast to increase, official sector sales are expected to decline as central banks that are not signatories to the Central Bank Gold Agreement increase their holdings of gold. World gold fabrication is expected to decline as a large increase in rupee denominated gold prices lowers demand for gold in India. The world gold price in 2006 is forecast to increase by 26 per cent to an average of US$560 an ounce.

Gold price to ease beyond 2007 The gold price (in real terms) is forecast to continue to Gold price strengthen in 2007 before easing slowly over the remainder Monthly, ended January 2006 of the outlook period. An assumed gradual easing in prices, in real terms, for the majority of minerals and energy commodities over the outlook period are expected to lessen 1500 fund interest in commodities (which is expected to also flow through to gold). In addition, concerns about a significant increase in infla- 1000 tionary pressures worldwide are expected to subside over the projection period as world oil prices are forecast to stabilise 500 and then ease gradually over the outlook period. However, a number of fundamental factors are expected to 2005-06 remain supportive over the medium term and are expected to US$/oz limit any fall in the gold price over the outlook period. Growth 1975 1985 in global mine production is expected to be constrained by a large increase in project development costs and a further forecast decline in gold production in South Africa. Net dehedging is also expected to continue as major international mining companies further reduce their hedge books in line with shareholder preferences. Barrick Gold’s recent takeover of Placer Dome is expected to provide support for dehedging over the outlook period.

1995

2005

Production to rise in 2006 World gold mine production is estimated to have increased by over 1 per cent in 2005 to 2495 tonnes. This increase came largely from an increase in production in Indonesia, Peru, Mexico and China. australian commodities > vol. 13 no. 1 > march quarter 2006

137

gold World gold mine production in 2006 is forecast to increase by over 2 per cent to 2557 tonnes as an increase in production in south America, Australia and the United States outweighs an expected decline in output in Indonesia. Freeport has indicated that payable sales from the Grasberg mine in Indonesia are expected to decline by around 40 per cent (around 34 tonnes) in 2006. A number of new mines in south America will ramp up to full production in 2006, including Barrick Gold’s Lagunas Norte mine in Peru (first full three years of production to average 800 000 ounces a year) and Veladero mine in Argentina (first full three years of production to average 700 000 ounces a year). Newmont’s Leeville mine in the United States also commenced production in the final quarter of 2005 and will ramp up to full production in 2006. In 2006, Newmont’s Phoenix mine (expected average annual gold sales of 350 000 – 420 000 ounces a year) in the United States is expected to begin production in the second quarter. Another Newmont operation, the Ahafo mine in Ghana (expected annual production of 500 000 – 550 000 ounces a year) is due to commence production in the second half of 2006.

… and increase slowly over the medium term World mine production is expected to increase modestly over the outlook period. Low gold prices in the late 1990s led to a reduction in expenditure on global gold exploration and a substantial fall in major gold discoveries. Despite the recent increase in global gold prices encouraging a substantial increase in gold exploration, there is a limited number of large projects due to commence over the outlook period. A substantial increase in mine development costs has also delayed the commencement of a number of projects. Newmont’s Akyem project in Ghana is expected to commence production in 2008 and will produce around 500 000 ounces a year. Placer Dome’s Pueblo Viejo project in the Dominican Republic has recently been approved for development and is expected to produce an average of 800 000 ounces a year commencing in late 2009. South America

South America is expected to account for a large proportion of new gold mine production over the medium term. South America has been the most successful region for the discovery of large gold deposits over the past fourteen years. In 2005, this region also accounted for close to a quarter of total expenditure on worldwide exploration for gold. A number of significant projects are expected to commence in south America over the remainder of the outlook period. Gold Fields’ Cerro Corona project in Peru is expected to commence production in late 2007. The project is expected to produce around 2.3 million ounces of gold over its estimated fifteen year life. Barrick’s Pascua Lama project on the border region of both Chile and Argentina — is expected to produce 750 000–775 000 ounces a year after commencing in 2009. South African gold output to stabilise

South Africa’s gold production has fallen significantly over the past ten years. South Africa’s gold production as a percentage of world production has fallen from around 23 per cent in 1995 to an estimated 12 per cent in 2005. In South Africa, a large increase in operating costs from the beginning of 2004, as well as a decline in rand denominated gold prices, led to a reduction in the operating margins of a number of mines. In response, a number of unprofitable operations were either closed or

138

australian commodities > vol. 13 no. 1 > march quarter 2006

gold mothballed over this period. South African gold production in 2005 is estimated to have been 295 tonnes, the lowest level since 1925. However, with the majority of the high cost operations already closed or scaled down and with a recent increase in rand denominated gold prices, gold output is expected to decline only moderately in 2006. Over the remainder of the outlook period, production is expected to fall further, but at a slower rate, as average cash costs continue to increase. Average cash costs are expected to increase as labor costs rise and average mining depths increase. Mining gold at up to 3000 metres below the surface is highly capital intensive and requires substantial development. Russian Federation

Gold production in the Russian Federation has increased by 16 per cent since the beginning of 2000 and reached an estimated 179 tonnes in 2005. Production is expected to continue to increase over the projection period as mining increasingly shifts from placer gold deposits to lode gold deposits (lode ore mines are capital intensive but last comparatively longer than placer operations). Approximately 80 per cent of Russia’s resources are estimated to be in hard-rock deposits. Continued growth in exploration expenditure, the increasing presence of foreign gold companies and industry consolidation are also expected to have a favorable influence on gold production in the Russian Federation. The rapid reorganisation of the Russian gold mining industry, following privatisation in the 1990s, led to the formation of a number of small companies with limited access to technology and the large capital requirements required for

Gold outlook World Fabrication consumption Mine production Scrap sales Residual net stock Official sector a Private sector a Producer hedging b Price LBMA AM – nominal – real c

Australia Mine production Refinery production Export volume Export value – nominal – real d Price – nominal – real d

Unit

2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

t t t t t t t

3 168 2 462 834 – 128 471 – 172 – 427

3 311 2 495 840 – 24 663 – 492 – 195

3 260 2 557 860 – 157 600 – 557 – 200

3 311 2 611 860 – 160 540 – 480 – 220

3 337 2 636 800 – 99 530 – 429 – 200

3 375 2 676 700 –1 510 – 331 – 180

3 396 2 694 700 2 490 – 338 – 150

3 403 2 708 700 –5 480 – 385 – 100

US$/oz US$/oz

409 435

445 458

560 560

580 566

540 516

513 481

475 437

443 399

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

t

267

265

265

302

314

326

331

324

t

315

309

308

308

310

322

327

322

A$m A$m

5 510 5 811

5 523 5 686

6 721 6 721

7 878 7 686

7 853 7 475

8 065 7 489

7 841 7 104

7 295 6 447

A$/oz A$/oz

547 577

562 579

682 682

795 776

789 751

779 724

746 676

704 622

a Sales (purchases). b Net additions (net reductions). c In 2006 US dollars. d In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Gold Fields Mineral Services; Australian Bureau of Statistics; London Bullion Market Association (LBMA); ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

139

gold developing large gold deposits. Of the estimated 400 companies in the Russian Federation, only two produce more than 300 000 ounces a year. The Russian Federation has substantial unexploited reserves and resources of gold. According to the US Geological Survey, the Russian Federation ranks fourth behind South Africa, Australia and Peru in gold reserves. In particular, Russia holds a substantial undeveloped gold deposit, Sukhoy Log, which has estimated reserves of around 32 million ounces (around 1000 tonnes). The Natalka deposit (part of the Mastrosov mine) in the Magadan region currently has indicated resources of around 17 million ounces (around 520 tonnes).

Central bank gold sales Central banks sales are estimated to have increased by 40 per cent to 663 tonnes in 2005, mainly as a result of higher sales from signatories to the Central Bank Gold Agreement. Central bank gold sales in 2006 are forecast to decline by 10 per cent to 600 tonnes. While signatories to the Central Bank Gold Agreement are expected to sell the majority of the 500 tonnes allowed under the second year of the agreement, purchases of gold by central banks that are not signatories to this agreement are expected to increase moderately.

Signatories to the second Central Bank Agreement to remain major sellers of gold over medium term… Signatories to the second Central Bank Gold Agreement are still expected to be major sellers of gold over the outlook period. A number of signatories still hold significant quantities of gold. For instance, at the end of 2005, France held 2857 tonnes of gold reserves, Germany 3428 tonnes, Italy 2452 tonnes and Switzerland 1290 tonnes. France has announced intentions to sell between 500 and 600 tonnes of gold over the life of the agreement, with the Netherlands also intending to sell 165 tonnes. Germany has the option to sell up to 600 tonnes of gold over the life of the agreement. While a number of the signatories have not announced their intentions for future gold sales, the haste with which the 500 tonne quota was reached in the first year indicates a number of signatories are still seeking to reduce their gold holdings over the life of the agreement.

… but other central banks likely to increase their holdings Over the medium term the actions of central banks with relatively low gold holdings will have an important bearing on the level of central bank gold sales. Recently, representatives of the central banks of the Russian Federation, Argentina and South Africa indicated that they are considering increasing China’s and Japan’s foreign exchange their holdings of gold. reserves Monthly, ended October 2005 There has recently been significant speculation on the potential for central banks in Asia and the Middle East to China increase their gold holdings in order to reduce the weighting Japan 1200 of US dollar holdings in their asset portfolios. From the beginning of 2000 to October 2005, China’s foreign exchange reserves increased over four times to around US$780 billion. 800 Over the same period, Japan’s foreign exchange reserves increased by one and a half times to just under US$820 400 billion. A substantial increase in global oil prices has also resulted 2005-06 in a strong rise in the foreign exchange reserves of oil US$b exporting nations. At current gold prices, gold accounts for Dec Dec Dec Dec Dec just over 1 per cent of total reserves in both China and Japan. 2000 2001 2002 2003 2004 2005 140

australian commodities > vol. 13 no. 1 > march quarter 2006

gold However, should these banks decide to reduce their holdings of US dollars, it is considered more likely that they would choose to diversify into other currencies, rather than gold.

Fabrication demand to fall in 2006 World gold fabrication demand is estimated to have risen by over 4 per cent in 2005, to 3311 tonnes, largely because of an increase in gold jewellery demand in the Middle East and India. An increase in the oil export earnings of a number of Middle Eastern countries encouraged higher gold jewellery demand in this region. World gold fabrication consumption is forecast to decline in 2006 largely because of a fall in gold jewellery demand in India, reflecting the positive effects of continued strong economic growth being offset by the negative effect on consumption of higher rupee denominated gold prices. From early February 2005 to mid-January 2006, rupee denominated gold prices increased by 35 per cent. However, in the Middle East, a substantial rise in export earnings from oil is expected to encourage further growth in gold jewellery demand. The US Energy Information Administration (EIA) recently forecast that net oil export revenues from OPEC countries will increase by 10 per cent in 2006 to $522 billion before easing by 5 per cent in 2007 (to $495 billion).

China’s role important over medium term In China, continued strong economic growth and rising urban incomes is expected to lead to an increase in gold jewellery demand and will be an important determinant of growth in world fabrication demand over the medium term. Given strong growth in consumer incomes, particularly in the urban areas of China, and the recent liberalisation of the gold market, demand for gold jewellery in China is likely to increase strongly in the medium term. However, partially offsetting the positive effect of these factors will be that, as China’s income growth continues, consumers will have a greater choice of competing luxury items and, in particular, competing jewellery options.

Dehedging

China’s gold Mine production Jewellery fabrication 200 150 100 50 t 1999 2000 2001 2002 2003 2004 2005

Gold producers cut an estimated 195 tonnes from their outstanding hedge positions in 2005, substantially lower than the 427 tonnes dehedged in 2004. The main contributors to dehedging in 2005 were Placer Dome, Newcrest and Barrick Gold Corporation. In 2006, dehedging is forecast to increase to 200 tonnes. Major gold mining companies are expected to continue to reduce their hedge books in order to gain greater exposure to prevailing gold prices. Shareholders continue to favor gold mining companies with limited hedging, as these companies provide greater exposure to movements in global gold prices. Major international gold companies are expected to continue to favor dehedging over the medium term. Barrick Gold’s recent acquisition of Placer Dome is likely to provide additional support for dehedging over the medium term given that the company has committed to reduce the size of its hedge book. Gold Field Metal Statistics estimates that, following the acquisition, Barrick’s hedge book will account for close to 40 per cent of the global hedge book. However, toward the end of the projection period the level of dehedging is expected to be constrained by the size of the remaining global hedge book. In addition, further assumed

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gold increases in interest rates and a forecast easing in world gold prices toward the end of the outlook period are likely to increase the incentive for producers to increase hedging.

Australian gold production and exports to rise in the medium term Australian gold production is forecast to decline moderately in 2005-06, as higher production from Newcrest’s Telfer gold/copper mine and the commencement of mining at a number of relatively smaller operations is offset by lower production at existing operations. Two operations commenced production in late 2005, including Ballarat Goldfields’ Ballarat East mine in Victoria (200 000 ounces a year) and BMA Gold’s Twin Hills mine in Queensland (70 000 ounces a year). Barrick’s Cowal mine (first full three years of production to average around 230 000 ounces a year) is expected to commence operations in the first quarter of 2006. In addition, Bendigo Mining’s Bendigo project in Victoria (initial production of 120 000 ounces a year) is expected to commence production in mid-2006. The recent increase in Australian dollar gold prices is expected to have a positive impact on domestic gold production over the projection period. From mid-2005 to the end of January 2006, Australian dollar denominated gold prices increased by 35 per cent to over $750 an ounce. Corresponding with this increase, a number of relatively small and/or short life operations have recently indicated that they will commence production in mid to late 2006. These projects include: Tanami Gold’s Coyote project (60 000 ounces a year); Gleneagle Gold’s Fortnum project (60 000 ounces a year); Renison Consolidated Mine’s Tom’s Gully project (45 000 ounces); and Wedgetail Exploration’s Nullagine project (70 000 ounces a year). Other projects that are expected to come on line later in the outlook period include the Boddington joint venture in Western Australia and Oxiana’s Prominent Hill project (100 000 to 130 000 ounces a year). An expansion of BHP Billiton’s Olympic Dam copper/gold mine is currently being assessed. However, given no specific indication has been provided of the size of the expansion and when it could be completed, this potential expansion is not included in the Australian gold production forecast. The value of Australian gold exports in 2005-06 is forecast to increase by 22 per cent to $6.7 billion largely because of higher export prices. Over the medium term, Australia’s real export earnings are projected to reach $6.4 billion in 2010-11 (4 per cent lower than forecast 2005-06 export earnings).

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contents metals

> William Contact Mollard > +61 2 > 6272 +61 ???? 2 6272 > [email protected] 2096 > [email protected]

metals outlook to 2011 propects for aluminium, copper and zinc Frank Drum, William Mollard, Kate Penney and Ryan Wilson

> With China’s aluminium smelting capacity growth expected to slow significantly over the projection period and consumption to grow strongly, China is expected to become a significant net importer of aluminium in the medium term. > World copper prices are forecast to average higher in 2006, as continued low levels of stocks and the potential for further supply disruptions support investment and speculative buying of copper. From 2007, copper prices are projected to ease as world production exceeds consumption and stocks rise from the current low levels. > In 2006, continued shortages of zinc concentrates, combined with strong growth in Chinese demand is forecast to result in world zinc prices reaching their highest level in real terms since 1989. Beyond 2006, significant additions to mine production capacity and subsequent strong growth in metal production are projected to result in lower world zinc prices.

Aluminium

World aluminium price Quarterly, ended December 2005

In 2005, world aluminium prices increased strongly, driven largely by strong growth in consumption and increased concerns over the future supply of aluminium. Prices are 2500 forecast to increase further in 2006 as world consumption exceeds production, leading to a decline in stocks. Prices are projected to ease over the remainder outlook period, as 2000 world production outpaces consumption after 2007. Developments in China and Europe will have a significant 1500 bearing on world aluminium prices over the outlook period. China is expected to continue to account for the majority of the growth in world aluminium demand. However, with 2005-06 A$/t growth in China’s aluminium smelting capacity expected to 1990 1995 ease over the outlook period, China is anticipated to become a significant net importer of aluminium. In Europe, increased energy costs and the likely further closure of aluminium production capacity are expected to restrict growth in production in that region, placing upward pressure on prices. Australia’s alumina production and export capacity is projected to increase significantly over the medium term, reflecting the construction of substantial new alumina refinery capacity, which is now ramping up, committed or in prospect. australian commodities > vol. 13 no. 1 > march quarter 2006

2000

2005

143

aluminium Prices to rise in 2006 Reflecting robust consumption growth and announced closures of production capacity in Europe and the United States, world aluminium prices rose strongly in 2005 to average almost US$1900 a tonne (US86c/lb) — 11 per cent higher than the average price in 2004. Aluminium prices continued to increase in early 2006, reaching US$2496 a tonne on 31 January — the highest real price in almost eleven years — reflecting strong market fundamentals and continued concerns over potential smelter closures in Europe. In 2006, aluminium prices are forecast to increase as world aluminium demand exceeds supply, leading to a decline in stocks. Stocks are forecast to fall to around 4.3 weeks of consumption, 33 per cent below the ten year average. Prices are forecast to rise by 10 per cent to average almost US$2100 a tonne (US95c/lb) in 2006. After declining for most of 2005, total reported world aluminium stocks increased significantly in mid-November, when 120 000 tonnes of offmarket aluminium stocks (likely to have been a major stockholder delivering against a short position) were deposited onto the London Metal Exchange. Total aluminium stocks (stocks on metal exchanges, plus producer and consumer stocks) at the end of 2005 were around 850 000 tonnes, equivalent to around 5 weeks of consumption. Aluminium prices are projected to increase in 2006, before easing over the remainder of the outlook period. With growth in world demand forecast to slow over the outlook period and production growth expected to remain steady, world stocks of aluminium are expected to increase. In 2011, real prices (in 2006 dollars) are projected to be around 25 per cent lower than in 2005.

World aluminium consumption growth to ease World aluminium consumption increased by an estimated 6 per cent in 2005 to 31.4 million tonnes, with China estimated to have accounted for around 60 per cent of this growth. In 2006, world aluminium consumption is forecast to increase by 5 per cent to 33.0 million tonnes, reflecting continued strong demand growth in China and the United States. China

China’s aluminium consumption is estimated to have increased by 19 per cent in 2005 to 7.1 million tonnes (23 per cent of global aluminium consumption), underpinned by strong growth in the construction and motor vehicle industries. In the first eleven months of 2005, motor vehicle production in China increased by over 11 per cent to 5.5 million vehicles, as rising incomes and low cost finance from major car manufacturers increased the demand for motor vehicles in China. Over the same period, fixed asset investment in China increased by almost 28 per cent to US$785 billion. The continued strong growth in such investment supported a 48 per cent increase in new construction spending to US$375 billion. The construction industry accounts for around 30 per cent of total aluminium consumption in China. In 2006, growth in aluminium consumption in China is expected to increase by a further 13 per cent to 8 million tonnes, underpinned by continued strong growth in the construction industry in the leadup to the Olympics in 2008, in addition to sustained growth in the motor vehicle industry. Over the medium term, China is expected to remain the major driver of growth in global aluminium demand to 2011, reflecting both its size and its stage of economic development; it is not unusual for developing countries to experience rapid increases in the intensity of metals use, well above that of more developed countries. 144

australian commodities > vol. 13 no. 1 > march quarter 2006

aluminium As incomes and living standards rise in developing countries many consumer goods become more affordable. For example, currently in China only 24 out of every 1000 people own a motor vehicle compared with 750 out of every 1000 people in the United States. Consequently, as incomes and standards of living in China continue to rise over the outlook period, the demand for motor vehicles is expected to expand rapidly. By 2011, aluminium use in the transport sector is expected to account for around 25 per cent of total aluminium consumption in China.

Aluminium, alumina and bauxite outlook Unit

2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

Production Primary aluminium

kt

29 822

31 505

32 884

34 573

36 351

38 226

39 894

41 252

Consumption Primary aluminium

kt

29 543

31 437

33 006

34 655

36 231

37 732

39 213

40 661

kt wks

3 033 5.3

2 862 4.7

2 740 4.3

2 658 4.0

2 778 4.0

3 272 4.5

3 952 5.2

4 543 5.8

US$/t USc/lb US$/t USc/lb

1 716 78 1 825 83

1 898 86 1 955 89

2 094 95 2 094 95

1 945 88 1 898 86

1 851 84 1 771 80

1 790 81 1 679 76

1 713 78 1 574 71

1 630 74 1 469 67

US$/t US$/t

393 418

443 456

473 473

393 383

308 294

251 236

220 202

193 174

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

World

Closing stocks Primary aluminium a – weeks consumption Prices World aluminium b – nominal – real c Alumina – nominal spot – real spot c

Australia Production Primary aluminium Alumina Bauxite

kt kt Mt

1 877 16 690 56

1 890 17 161 58

1 930 18 283 62

1 931 20 480 65

1 934 21 380 68

1 938 22 980 73

1 942 23 080 74

1 946 23 080 74

Consumption Primary aluminium

kt

318

320

322

331

331

332

333

333

Exports Primary aluminium Nominal value Real value d Alumina Nominal value Real value d Bauxite Nominal value Real value d Total value – nominal – real d

kt A$m A$m kt A$m A$m kt A$m A$m A$m A$m

1 3 3 13 3 3 6

546 441 629 572 781 988 917 125 132

7 347 7 749

1 3 3 14 4 4 4

512 726 836 073 383 513 900 123 126

8 232 8 475

1 4 4 14 5 5 6

637 503 503 813 343 343 690 149 149

9 995 9 995

1 4 4 16 6 5 6

602 393 286 715 070 922 892 155 151

10 618 10 359

1 4 4 17 6 5 6

606 285 079 608 224 924 932 162 154

10 670 10 156

1 4 3 19 6 6 6

609 303 996 200 802 317 918 161 150

11 266 10 462

1 4 3 19 6 6 6

612 286 883 293 796 157 917 161 146

11 243 10 186

1 4 3 19 6 5 6

615 150 668 285 563 801 917 161 142

10 874 9 611

a Producer and LME stocks. b LME cash prices for primary aluminium. c In 2006 US dollars. d In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Commodity Research Unit; London Metal Exchange; World Bureau of Metal Statistics; ABARE.

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aluminium Direct and indirect infrastructure development required to support the staging of the 2008 Beijing Olympics have also been significant drivers of Chinese demand for minerals and metals in recent years. Following the 2008 Beijing Olympics, growth in the construction industry and growth in industrial production more generally are projected to ease. Overall, aluminium consumption in China is projected to increase by around 8.3 per cent a year over the outlook period. United States

Aluminium consumption in the United States increased by an estimated 8 per cent in 2005 to 6.3 million tonnes, largely based on strong growth in the construction industry. With long term financing costs remaining relatively unchanged over the year, US construction spending in the first eleven months of 2005 increased by 9 per cent to US$1031 billion. In 2005, housing starts increased by 5.6 per cent year on year, highlighting the strength of construction activity in the United States. In contrast, motor vehicle production in the United States increased comparatively slowly (by 2 per cent over the first eleven months of 2005), as high fuel prices and rising interest rates increased the cost of motor vehicle purchases, reducing the demand for new vehicles. Aluminium consumption in the United States is expected to ease in 2006, reflecting further tightening of monetary policy and assumed lower industrial production. Higher interest rates are expected to raise financing costs of new vehicles and housing, restricting growth in both the construction and motor vehicle industries. Reconstruction activity following hurricanes Katrina and Rita will provide some fillip for aluminium consumption in the construction sector, but the effect will be transient. In 2006, aluminium consumption in the United States is forecast to increase by 3.5 per cent to 6.5 million tonnes. Over the medium term, growth in aluminium demand in the United States is expected to ease, in line with lower assumed economic and industrial production growth. Consumption in the United States is projected to increase at around 2.7 per cent over the outlook period, reaching 7.5 million tonnes in 2011. Over the outlook period, world aluminium consumption is forecast to grow on average by 4.2 per cent to reach 40.7 million tonnes in 2011.

World aluminium production growth to ease World aluminium production grew by an estimated 6 per cent in 2005 to 31.5 million tonnes. Production is expected to increase by a comparatively slower 4 per cent in 2006 to total around 32.9 million tonnes, underpinned by smelter capacity expansions in China and the Middle East. Over the medium term, recent measures taken to slow growth in aluminium production in China, in addition to higher global operating costs, will have a significant bearing on world production growth.

China’s production growth to slow Aluminium production in China increased by 17 per cent in 2005 to total around 7.7 million tonnes, accounting for the majority of the estimated growth in world aluminium production in the year. This follows estimated annual growth of 27 per cent in 2003 and 19 per cent in 2004. The relatively lower growth in China in 2005 indicates that the policy measures implemented by the Chinese Government during 2005 to rationalise the industry and moderate growth in both production and exports have already begun to take effect. The measures included: abolishing an 8 per cent value added tax rebate on aluminium exports; imposing a 5 per cent tax on aluminium exports; and removing tax concessions on alumina imported for the purpose of producing aluminium for export, referred to as ‘alumina tolling’. 146

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aluminium The removal of alumina tolling concessions and increased China’s net exports of aluminium raw material costs (spot alumina prices were US$600 in December) significantly increased the cost structure of many aluminium smelters in the second half of 2005. These 100 increased costs have resulted in a significant reduction in export volumes from China and the closure of some smelting 80 capacity. According to the China Non Ferrous Industry, 41 60 smelters in China closed in 2005, accounting for a reduction of 550 000 tonnes of production capacity. In the second half 40 of 2005, net exports of aluminium from China declined by more than 54 per cent to 216 000 tonnes. 20 Growth in aluminium production in China is expected to ease in 2006, as the Chinese Government continues to kt rationalise the industry and operating costs remain high. For J F M A M J J A S O N D 2005 example, alumina spot prices are forecast to rise by 7 per cent to average US$473 a tonne in 2006. Reflecting this, aluminium production in China is expected to increase by 12 per cent to 8.6 million tonnes in 2006. Over the outlook period, the growth in aluminium production in China is expected to continue to slow, with further changes to China’s aluminium policy expected. These measures are likely to include: bans on the construction of smelters with capacity below 100 000 tonnes a year; stricter capital investment requirements; and updated (and more stringent) environmental standards. Consequently, with production growth expected to ease and demand forecast to remain relatively strong, China is expected to become a significant net importer of aluminium toward the end of the outlook period.

North American production relatively stable Aluminium production in north America is estimated to have increased by 4 per cent in 2005 to around 5.3 million tonnes, driven largely by the completion of the 307 000 tonnes expansion at the Alouette smelter in Canada and the restarting of previously idled capacity at the Becancour, Massena and Wenatchee smelters. In 2006, north American aluminium production is expected to decline by 2 per cent to around 5.2 million tonnes. The announced closure of the 195 000 tonne smelter at Maryland in the United States (reportedly in response to high electricity costs) is expected to more than offset any further ramping up of production at Alouette. Over the medium term, aluminium production in north America is expected to increase marginally, underpinned by further additions to smelting capacity in Canada. By 2011, aluminium production in north America is expected to increase to around 5.4 million tonnes.

Energy cost pressures to restrict future production expansion Over the medium term, expansions in aluminium production capacity will be determined largely by the ability of new and existing smelters to secure competitive power arrangements. In developed countries in particular, where aluminium smelters compete for power with other industrial and residential users, producers are likely to find it increasingly difficult to replace current contracts with similar priced contracts. For example, in 2005, electricity prices in Germany (a European benchmark) increased by 55 per cent year on year, to average almost US$65 a megawatt hour. Rises in electricity prices, in addition to increasing costs associated with aging technology and low economies of scale, have combined to significantly reduce the profitability of australian commodities > vol. 13 no. 1 > march quarter 2006

147

alumina aluminium production, particularly in Europe. Reflecting this, five aluminium smelters in Europe and the United States, with a combined capacity of 493 000 tonnes (around 1.5 per cent of total world production in 2005), have announced that they will start closing capacity in 2006. A significant proportion of planned new capacity over the medium term is expected to be located in the Middle East (colocated with abundant low cost natural gas supplies) and in Iceland, which has abundant resources of hydroelectric and geothermal power. In Iceland, capacity expansions at Grundartangi and Reydarfjardur are expected to increase production capacity by 482 000 tonnes over the medium term. In the Russian Federation, planned expansions at Krasnoyarsk and Sayanogorsk will increase production capacity by a combined 377 000 tonnes a year, using electricity from the nearby hydroelectric stations at Krasnoyarsk and Shushanskaya. Many planned developments include integrated power projects. For example, in agreeing to build a 500 000 tonnes a year smelter in India, Vedanta Resources are also building a 1215 megawatt power plant in conjunction with the expansion. Similarly, Alcan proposes to build a 350 000 tonne a year expansion in Oman in addition to a 1000 megawatt power plant, which will be a dedicated power supply for the smelter. Overall growth in world aluminium production is expected to slow over the outlook period. World aluminium production is projected to total 41.3 million tonnes in 2011, 31 per cent above production in 2005.

Australia’s export earnings to rise in 2005-06 Australia’s export earnings from aluminium are forecast to increase by 21 per cent in 2005-06 to total $4.5 billion, reflecting an increase in both export volumes and prices. The completion of capacity expansions at Tomago (70 000 tonnes) in late 2005, in addition to expansion at Kurri Kurri (7000 tonnes) and Boyne Island (10 000 tonnes) are expected to underpin this increase. Overall for 2005-06, Australian export volumes are forecast to increase by 7 per cent to over 1.6 million tonnes.

… but to ease over the medium term Over the medium term, there are no committed expansions to Australian aluminium production capacity. Studies have been conducted into an expansion at Boyne Island (218 000 tonnes expansion) and the construction of a new smelter by Aldoga (420 000 tonnes) at Gladstone in Queensland; however, any decisions on the possible expansion of either site have been put on hold. Real earnings (in 2005-06 dollars) from aluminium exports in 2010-11 are projected to decline by 18 per cent from forecast 2005-06 earnings, largely owing to lower export prices.

Alumina Alumina spot prices increased by 13 per cent in 2005 to US$443 a tonne, underpinned by low world availability of alumina and strong growth in China’s aluminium production, which accounts for the bulk of spot market alumina purchases. In 2005, China’s net imports of alumina increased by 19 per cent to around 7 million tonnes, around 11 per cent of world alumina production. Committed expansions to world alumina production capacity in 2006 are currently planned in China (1.5 million tonnes a year), Brazil (1.5 million tonnes a year) and Australia (850 000 tonnes). However, the slower than expected buildup of production from new 148

australian commodities > vol. 13 no. 1 > march quarter 2006

copper capacity in Australia (notably the CAR1 refinery in Gladstone) and continuing strong Chinese demand for alumina in the spot market are expected to keep the supply–demand balance tight in 2006. Reflecting this, the 2006 alumina spot price is forecast to increase by around 7 per cent to US$473 a tonne. Over the medium term, further capacity expansions are expected in Brazil, China, India and Australia. As a result, spot alumina prices are expected to fall over the projection period. In 2011, real spot prices for alumina (in 2006 dollars) are forecast to average around 60 per cent below 2005 prices.

Australian alumina production to expand substantially

Alumina spot price as a percentage of LME aluminium price Quarterly, ended December 2005 30 25 20 15 10 % 1990

1995

With the completion of the CAR1 refinery in early 2005 and the impending completion of capacity expansions at Worsley (250 000 tonnes) and Pinjarra (600 000 tonnes) in early 2006, Australia’s alumina production is expected to increase by around 12 per cent in 200607 to 20.5 million tonnes. In 2007 and 2008, further expansions to Australia’s alumina refining capacity are expected. The 1.7 million tonnes a year production expansion at the Gove alumina refinery in the Northern Territory is expected to be completed in 2007. A further expansion at Wagerup Unit 3 (2 million tonnes a year) is expected to be commissioned in 2008. An 800 000 tonne a year expansion at Worsley, which is proposed to commence production in 2008, is currently subject to board approval and as a result has not been included in the medium term outlook. With limited growth in Australia’s aluminium production capacity expected over this period, it is anticipated that the majority of Australia’s projected increase in alumina production will be exported. In 2005-06, Australia’s export earnings from alumina are forecast to increase by 22 per cent to $5.3 billion. Given the expected expansions to refinery capacity over the medium term, Australia’s export shipments of alumina are projected to increase by 33 per cent to 19.3 million tonnes in 2010-11. In 2010-11, real export earnings from alumina are projected to be around $5.8 billion, 8 per cent above forecast 2005-06 earnings, with the strong growth in export volumes over the outlook period being partially offset by lower (real) export prices.

2000

2005

Copper In 2005, global copper prices rose strongly, despite a slight fall in global copper consumption, as growth in refined output was constrained by labor disputes, natural disasters, maintenance at a number of world smelters and other production disruptions. For 2006 as a whole, world refined production is expected to only marginally outweigh consumption. As such, stocks will rise but remain very low historically, particularly in the first half of 2006. In this environment, the potential for further supply disruptions and continued investment and speculative buying is expected to support copper prices. Consequently, global copper prices in 2006 are forecast to average higher than in 2005, despite a forecast rise in global copper stocks. For much of the remainder of the decade, global copper production is expected to exceed consumption, resulting in a steady increase in copper stocks. This outcome is projected to australian commodities > vol. 13 no. 1 > march quarter 2006

149

copper result in lower world copper prices. However, continued strong growth in China’s copper consumption over the medium term is expected to stop real prices falling to the low levels witnessed in 2001 and 2002. The intensity of copper use in China is still substantially below that of developed countries, such as the United States and Japan, implying that there is considerable scope for further strong growth in copper consumption in China.

Copper prices strong in 2005 … For 2005 as a whole, global copper prices averaged around US$3680 a tonne (US167c/ lb), 28 per cent higher than the 2004 average price of under US$2870 a tonne. Global copper stocks remained at historically low levels in 2005. Copper stocks on metal exchanges (London Metal Exchange, Comex and Shanghai Futures Exchange) increased by over 30 000 tonnes in 2005. However, total copper stocks (stocks on metal exchanges, producer and consumer stocks) declined to an estimated 519 000 tonnes or 2.3 weeks of consumption in 2005.

… and to increase further in 2006 … In 2006, world copper consumption is expected to increase — despite lower assumed world economic growth — reflecting continued strong growth in copper demand in China as well as lower levels of destocking in the United States and European Union. Comparatively higher growth in world refined production is expected to result in a small increase in stocks. However, year end stocks are still expected to remain below three weeks of consumption. Despite an expected increase in year end stocks in 2006, world copper prices are forecast to increase by 28 per cent to average around US$4720 a tonne (US214c/lb). Prices, particularly in the first half of 2006, are expected to continue to be supported by speculation about the potential for additional disruptions to supply as well as continued low stocks. The large number of labor disputes and other disruptions that constrained growth in refined production in 2005 have persisted in early 2006 and continue to support high copper prices. In late December 2005, just under 30 000 unionised workers at Codelco’s operations (the world’s largest copper miner) in Chile went on strike for around three weeks. While this industrial activity did not have a significant impact on production at Codelco’s operations (as the majority of these workers were involved in maintenance and food provision services), the potential for disruption to mine output supported further speculative buying of copper.

… but declining over much of the remainder of the medium term

Copper

4

Real price

8

Stocks

3

6

2

4

1

2

US$’000/t

1991 1995 1999

150

weeks

2003

2007

2011

From 2007, global copper prices are projected to ease for much of the outlook period as world copper production exceeds consumption and copper stocks increase from the current low levels. However, a number of factors are expected to limit real prices falling to the low levels of 2001 and 2002. On the supply side, consolidation in the copper industry and an increase in project development costs are expected to constrain growth in world copper mine and refined production. On the demand side, continued strong forecast growth in China’s copper consumption over the outlook period is expected to result in world copper consumption growth being higher than witnessed over the five years from 2001 to 2005. australian commodities > vol. 13 no. 1 > march quarter 2006

copper In 2011, real copper prices (in 2006 dollars) are projected to be around 33 per cent below 2005 average prices.

Growth in world consumption to increase in 2006 In 2005, global copper consumption is estimated to have fallen slightly to 16.7 million tonnes. A substantial increase in copper consumption in China was offset by falls in consumption in the United States, Japan, the Republic of Korea and the European Union. In the latter countries, consumers are reported to have delayed purchases because of higher copper prices and instead drew down existing stocks of copper. Growth in world copper consumption is forecast to increase in 2006, despite lower assumed world economic growth, reflecting continued strong growth in copper demand in China and lower destocking in the United States and the European Union. Over the medium term, developments in China and the United States will continue to have the most important bearing on world copper consumption.

China to dominate consumption growth In 2005, copper consumption in China is estimated to have increased by 12 per cent, largely because of continued strong growth in industrial production, fixed asset investment and electricity developments. China accounted for around 22 per cent of global copper consumption in 2005. Over the medium term, with China being the world’s largest copper consumer and its economic growth assumed to be stronger than all other major copper consumers, China’s copper consumption growth will be the major determinant of global consumption growth. China’s government continues to encourage investment in the copper intensive power sector in an attempt to ease power shortages (the power sector accounts for an estimated 46 per cent of copper consumption in China). According to the US Energy Information Administration, China intends to expand electricity generation capacity to 570 gigawatts by 2010 (from

Copper outlook 2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

15 826 16 716

16 500 16 700

17 320 17 250

18 130 17 830

18 819 18 520

19 360 19 180

19 850 19 900

20 410 20 680

719 3.0

519 2.3

589 2.6

836 3.6

1 106 4.7

1 284 5.5

1 262 5.3

1 053 4.4

2 866 130.0 3 048 138.3

3 678 166.8 3 788 171.8

4 719 214.1 4 719 214.1

3 717 168.6 3 626 164.5

2 950 133.8 2 822 128.0

2 550 115.7 2 391 108.5

2 700 122.5 2 482 112.6

2 800 127.0 2 524 114.5

2003 -04

2004 -05

2005 -06 f

kt kt

811 459

905 478

955 484

1 045 560

1 107 590

1 191 600

1 252 593

1 171 590

kt kt A$m A$m

1 286 301 2 166 2 285

1 326 322 3 082 3 173

1 520 317 4 687 4 687

1 568 365 4 676 4 562

1 672 385 4 045 3 850

1 911 389 3 908 3 629

2 131 377 3 997 3 621

1 879 369 3 867 3 418

World

kt Production Consumption kt Closing stocks kt wks – weeks consumption Price LME US$/t – nominal

– real a

USc/lb US$/t USc/lb

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

Australia Mine output Refined output Exports – ores and conc. – refined Nominal value Real value b

a In 2006 US dollars. b In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Copper Study Group; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

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copper around 500 gigawatts in 2005). The largest project under construction is the Three Gorges Dam, which is expected to be completed in 2009 and will include 26 separate 700 megawatt (electric) generators for a total of 18.2 gigawatts. Continued strong economic growth in China will also result in an increase in consumer incomes, particularly in urban areas. As incomes rise in China (and developing countries generally), the composition of household expenditure will increasingly shift away from primary products toward manufactured products (such as electrical goods and machinery) and services (such as transport, electricity and housing), hence increasing the intensity of copper use. China’s metal consumption per person (intensity of copper use), while increasing, is still low in comparison with that in developed Asian countries, implying that there is considerable potential for further increases in copper consumption over the medium term.

United States still a major consumer In 2005 the United States accounted for an estimated 14 per cent of total global copper consumption. Consequently, growth in copper demand in the United States will continue to have an important bearing on world copper consumption over the medium term. US 30 year conventional mortgage rate The construction industry accounts for around half of total Monthly, ended December 2005 copper consumption in the United States. A typical American home is estimated to use around 180 kilograms of copper. 10 Continued low 30 year mortgage rates and ongoing strength in US housing prices encouraged a substantial increase in housing construction in 2005. Housing starts and building 8 permits increased by around 6 per cent and 3 per cent respectively in 2005, with overall construction spending in 6 the United States rising by just under 9 per cent to US$1120 billion. 4 Rebuilding of houses and electrical infrastructure in Louisiana and Mississippi, following hurricane activity in late % 2005, is expected to provide support for construction activity 1993 1997 2001 2005 in the short term. However, over the remainder of the medium term, growth in construction is expected to ease moderately as assumed further increases in US interest rates and a fall in housing affordability result in lower demand for new housing.

India potentially a major consumer India is emerging as another potentially large consumer of copper. India’s population exceeds 1 billion and, according to UN projections, is expected to eventually surpass that of China. India is attempting to substantially expand its electric power generating capacity over the outlook period to reduce the frequency of power outages and provide the basis for strong economic growth. The government has targeted capacity increases of 100 gigawatts over the next ten years. Unlike in China, the services sector rather than the manufacturing sector in India is currently assuming a greater role as a driver of income growth. As such, while copper consumption in India is forecast to grow strongly over the outlook period, it is not expected to replicate the very strong growth trend evident in China. Between 2005 and 2011, world copper consumption is projected to rise by 24 per cent to approximately 20.7 million tonnes.

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copper World copper mine production Despite a significant increase in global copper prices since the beginning of 2004, world copper mine production is estimated to have risen only by 2 per cent in 2005 to 14.8 million tonnes. Production in Chile — the world’s largest copper producing country — is estimated to have fallen by 3 per cent in 2005 because of industrial activity and as mine sequencing decisions resulted in the mining of ore with lower grades of copper and higher grades of molybdenum. In 2006, world copper mine production is forecast to increase by over 3 per cent to 15.3 million tonnes as a forecast fall in output from Codelco’s operations in south America and Freeport’s Grasberg mine in Indonesia is offset by the commencement of a number of operations in south America. Freeport recently indicated that mine sequencing plans will result in production from the company’s Grasberg mine in Indonesia declining by around 11 per cent in 2006. Production from Codelco (the world’s largest copper mining company) is also expected to fall marginally in 2006 as the copper content of its mines declines. Despite molybdenum prices declining from over US$34/lb in late October 2005 to around US$22/lb in early 2006, prices are still substantially higher than in early 2004. As such, a number of global copper operations are likely to continue to alter mine sequencing plans in order to optimise the production of molybdenum. BHP’s Escondida sulfide leach project (180 000 tonnes a year) is expected to commence production in the second half of 2006. Phelps Dodge’s Cerro Verde mine expansion in Peru (increasing capacity by just under 180 000 tonnes a year) is expected to begin production in late 2006.

Mine production to increase steadily over medium term During the period of low copper prices in 2001 and 2002 exploration and investment budgets were significantly reduced. The recent strong copper prices have encouraged an increase in global expenditure on exploration and investment in new capacity. However, an increase in development costs for copper projects and the substantial time required to develop a project following discovery is expected to limit an aggressive increase in new copper capacity over the outlook period. A higher level of consolidation within the copper industry is also expected to reduce the likelihood of overinvestment in capacity — which has occurred following previous high real copper prices. Copper mine production in south America is expected to grow significantly over the outlook period. In Brazil, CVRD is planning to increase production by over 600 000 tonnes a year by 2011-12 through the development of the 118, Salobo, Cristalino and Alemao projects. Production from Codelco is expected to increase strongly toward the end of the projection period, reaching around 2.2 million tonnes in 2010 (estimated production in 2005 was 1.7 million tonnes). Codelco’s Gaby copper mine in Chile (annual production of 150 000 tonnes of copper) is expected to commence production in early 2008. Codelco also plans to invest $12 billion in a number of other projects in order to substantially increase production over the next six years. First production from Ivanhoe Mines’ Oyu Tolgoi deposit in Mongolia is scheduled for mid-2008. With average annual production of over 450 000 tonnes of copper a year for a minimum of 35 years, the Oyu Tolgoi is potentially the world’s largest greenfield mine. In Pakistan, Tethyan Copper is expected to commence production at its Reqo Diq project late in the outlook period. In early January 2006, Tethyan Copper indicated that the Reqo Diq resource now exceeds 12 million tonnes of contained copper. World copper mine production is projected to be over 18 million tonnes in 2011. australian commodities > vol. 13 no. 1 > march quarter 2006

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copper World refined copper production World refined copper output is estimated to have increased by over 4 per cent in 2005 to 16.5 million tonnes. In 2006, production is forecast to increase by 5 per cent to 17.3 million tonnes, with much of this growth expected to again occur in China. In Chile, BHP Billiton’s Spence project (200 000 tonnes of copper cathode a year) is expected to commence production during the last quarter of 2006. Developments in China are expected to have an important bearing on total growth in world refined production over the medium term. Over the past five years, China’s refined production has increased by over 60 per cent to an estimated 2.5 million tonnes in 2005.

China announces plans to curb growth in smelter capacity In late 2005, China announced measures to slow growth in domestic copper smelting capacity. A number of these measures were similar to those introduced in China’s aluminium industry and included halting construction of copper smelters with a capacity of less than 100 000 tonnes a year and that had not secured supplies of copper concentrate. The capital requirement for new investment was also increased from 20 per cent to 35 per cent. China’s government is also believed to be considering removing existing tax concessions for copper smelters that import copper concentrates for the purposes of exporting refined copper. Over the projection period, the major effect of these measures is expected to be to increase consolidation within China’s copper industry. A number of major companies in China are currently planning to increase copper production significantly. For instance, in December 2005 Jiangxi copper commenced an expansion of the Guixi smelter. The expansion will increase the capacity of the smelter by 300 000 tonnes a year (from 400 000 tonnes a year) and is expected to be completed in late 2007. In addition, Norddeutsche Affinerie is also planning to build a copper smelter and refinery in China in a joint venture with Yanggu Hongxiang Investments and the Shandong Fengziang group. The plant will have an initial output of 200 000 tonnes a year, before increasing to 400 000 tonnes a year.

Australian production to increase over medium term Australia’s mine production of copper is forecast to increase by 6 per cent in 2005-06 to 955 000 tonnes, largely because of higher expected production from Tritton Resources’ Tritton copper mine and Newcrest’s Telfer gold/copper mine. Refined copper production in Australia is forecast to increase by 1 per cent to 484 000 tonnes in 2005-06, as higher production from Straits Resource’s Whim Creek mine is offset by lower expected production from BHP Billiton’s Olympic Dam mine. In 2005-06, earnings from Australia’s copper exports are forecast to increase by 52 per cent to around $4.7 billion largely because of higher export prices and an increase in exports of copper concentrates. Over the medium term, the potential for an increase in production from Olympic Dam will be a major influence on growth in Australia’s copper mine production. BHP Billiton is currently investigating the potential for an expansion of the Olympic Dam mine to 500 000 tonnes a year (but could expand by up to 1 million tonnes a year). However, given that no specific indication has been provided of the size of the expansion and when it could be completed, this potential expansion is not included in the Australian copper production forecast. Additional production is also expected from development of Oxiana’s Prominent Hill copper/gold project in South Australia, which is forecast to produce at a rate of between 90 000 and 100 000 tonnes of copper a year. A detailed feasibility study is currently being conducted and is expected to be completed in mid-2006.

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zinc A number of comparatively smaller operations are also expected to commence production over the medium term. First production from Universal Resource’s Roseby mine in Queensland (50 000 tonnes a year of copper concentrate) is expected to begin in late 2007. CopperCo is planning to commence production from the Lady Annie project in late 2006, with initial planned production of 15 000 tonnes a year of copper cathode. Jabiru Metals’ Jaguar copper/zinc project in Western Australia is expected to produce over 9000 tonnes a year of copper in concentrates commencing in early 2007. Over the remainder of the outlook period, Australia’s export earnings from copper are projected to decline only slightly in real terms (2005-06 dollars) to $3.4 billion in 2010-11, as a substantial increase in export volumes is offset by a projected decline in world copper prices over much of the period.

Zinc The recent substantial rise in US dollar zinc prices reflects current market conditions of strong demand, particularly from China, limited supply growth and steadily falling stocks. After rising by 32 per cent in 2005, world zinc prices on the London Metal Exchange have moved even higher in early 2006, to around US$2100 a tonne, the highest price in real terms since 1989. Developments in China will continue to have a major impact on global zinc markets over the medium term. Continued rapid economic development is expected to ensure that China continues to account for the majority of the growth in world zinc consumption and consolidate its position as the world’s largest zinc consumer. Over the medium term, growth in world zinc demand is expected to be more than offset by significant new additions to world zinc mine and metal production capacity, as producers respond to current strong prices and planned new capacity comes on line. The increase in supply is expected to be sufficient to rebuild stocks and, as a result, real zinc prices are forecast to decline in the latter half of the projection period.

Prices to weaken but remain above historical levels In 2005, world zinc prices averaged US$1380 a tonne (63c/lb). Despite the delivery of further ‘hidden stocks’ in mid-2005 (estimated at around 106 000 tonnes), strong demand and limited supply resulted in a steady reduction of zinc stocks on the London Metal Exchange — falling by 20 per cent to 5.7 weeks of consumption. In 2006, world zinc prices are forecast to rise in line with constrained zinc mine supply and a strengthening in Zinc world zinc demand. In 2007, world zinc prices are forecast to weaken, but remain high, averaging US$1770 a tonne (80c/lb) — 5 per cent lower than the forecast 2006 price of 12 2000 US$1860 a tonne (85c/lb). World price After a further decline to 3.8 weeks of consumption in 9 2006, world zinc stocks are projected to increase margin- 1500 ally to 3.9 weeks of consumption in 2007. As mine 6 capacity expands and zinc supply responds to higher prices 1000 (discussed later), world zinc stocks are forecast to rise further after 2007, leading to an easing in world zinc prices. By 500 3 2011, world zinc prices in real terms (2006 dollars) are 2006 Stocks weeks of world consumption forecast to average over 45 per cent below the level reached US$/t in 2006. 1990 1995 2000 2005 2011 australian commodities > vol. 13 no. 1 > march quarter 2006

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zinc Galvanised steel dominates world zinc end use Galvanising of steel accounts for over 50 per cent of total world zinc consumption and so, the outlook for zinc demand is largely determined by developments in world galvanised steel markets. The production of brass and bronze and other zinc based alloys are the other major uses for zinc, accounting for approximately 20 per cent and 15 per cent of total world consumption respectively.

China continues to dominate world growth in the short term In both the short term and medium term, China (already the world’s largest consumer) is expected to increase its share of total world zinc consumption, reflecting the relative size of its economy and the high rate of growth in industrial production expected over the medium term. Over the past decade, China’s demand for galvanised steel has grown strongly in the infrastructure (bridges, electricity transmission and distribution), industrial (warehouses, factories), construction (commercial and residential) and manufacturing (motor vehicles, white goods) sectors. This has supported strong growth in China’s zinc consumption, which has averaged 16.5 per cent a year over the past ten years to reach an estimated 3.4 million tonnes in 2005. Looking forward, the largest increase in the demand for galvanised steel in China is expected from the construction and infrastructure sectors. An estimated 80 million people Galvanising migrated from rural to urban areas between 2000 and Galvanising is the most common form of rust proofing 2005, underpinning strong growth in galvanised steel crude steel. Crude steel reacts with oxygen, water demand in residential construction, transport and infrastrucand other pollutants in the atmosphere to form iron ture development. The bulk of China’s industrial activity is oxide (or rust). This process reduces the structural also occurring in coastal regions, where the natural enviintegrity and life cycle of steel products, necesronment results in more corrosion. As this process of rural– sitating the addition of metal alloys to prevent the underlying steel from corroding. Galvanised steel is urban migration has the potential to continue for upwards of produced by the permanent metallurgical bonding twenty years, the outlook for zinc demand in China is very of zinc or zinc alloys to steel, primarily through positive. either submerging the crude steel in molten zinc (hot In 2006 and 2007, growth in Chinese zinc demand dipped galvanising) or electrolytic galvanising. is expected to ease (albeit moderately) in line with lower The outer layer of galvanised steel is all zinc, but successive layers are a mixture of zinc and economic growth in China’s key export markets, such as the iron, with a core of pure steel. While galvanising United States and Japan. Lower demand for zinc intensive protects steel from corrosion, the process does not manufactured goods will result in lower demand for zinc in affect the mechanical properties of the underlying China. crude steel. The outer layer of zinc on galvanised However, weakening export demand (for zinc intensteel provides cathodic protection, by acting as a ‘sacrificial layer’, such that the zinc layer is corroded sive goods from China) is expected to be partially offset instead of the base metal. As a result, the life cycles by growth in domestic demand. As the Chinese economy of galvanised steel are significantly enhanced continues to grow, rising per person incomes are expected compared with crude steel. to translate into increased demand for zinc intensive These characteristics account for the intensive use consumer durables, such as motor vehicles and household of galvanised steel in construction, industrial and manufacturing applications. The global construction whitegoods. industry is estimated to consume just over half of On balance, with steady increases in demand from the all galvanised sheet — the most common form of construction and infrastructure sectors, the slower expangalvanised steel produced — while around a third sion of manufacturing activity is expected to result in a slight is consumed in the production of motor vehicles and easing of growth in zinc consumption in China in 2006 and a further 10 per cent in manufactured whitegoods. 2007, relative to 2005. 156

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zinc Chinese cold rolling and galvanising capacity To date a lack of both cold rolling and galvanising capacity has limited the production of high quality galvanised steel in China, and hence a large proportion of China’s requirements for high quality galvanised steel has been imported. For example, a lack of sufficient cold rolling capacity has limited the ability of most Chinese steel mills (excluding Boasteel) from producing high quality galvanised steel from cold rolled sheet. As a result, significant quantities of galvanised sheet steel have been imported for use in the export focused manufacturing sector, especially from Japan and Korea (particularly for automotive steel). More recently, significant investments in advanced steel making technologies have occurred in China and additional projects are expected in coming years. As a result, China’s cold rolling capacity is forecast to rise significantly in the medium term. The further development of China’s steel industry is also expected to benefit from increased access to ‘western’ technologies through joint ventures such as that undertaken by Baoshan Iron and Steel, the Nippon Steel Corporation and Arcelor to produce high quality galvanised steel for automobile manufacture. China also has insufficient galvanised steel production Sheet steel and cold rolling capacity to meet current domestic requirements and, as a Sheet steel is produced by reheating and rolling result, imports a large proportion of its requirements. Over slab steel. A separate cold rolling process is then the medium, term significant additional capacity is planned used to further reduce the thickness of the steel sheet to come on line and hence China’s dependence on imported as well as impart the required technological properties for end use applications, such as strength. The galvanised steel is forecast to be reduced substantially. end product is widely used to produce galvanised There are currently estimated to be over twenty new steel used in the automobile manufacture, construcgalvanising process lines under construction. If completed tion, household appliance and packing industries, on time, these lines have the potential to double continuous especially within developed economies. galvanised production capacity in China within two years.

Zinc outlook 2004

2005

2006 f

2007 z

2008 z

2009 z

2010 z

2011 z

kt kt

10 170 10 477

10 430 10 690

10 740 11 040

11 340 11 370

11 970 11 850

12 540 12 220

12 920 12 680

13 360 13 090

kt wks

1 020 7.1

810 5.7

550 3.8

570 3.9

650 4.4

720 4.8

990 6.5

1 290 8.4

US$/t USc/lb US$/t USc/lb

1 047 48 1 114 51

1 380 63 1 421 64

1 863 84 1 863 84

1 768 80 1 724 78

1 630 74 1 559 71

1 355 61 1 271 58

1 260 57 1 158 53

1 143 52 1 030 47

2003 -04

2004 -05

1 355

1 352

1 409

1 473

1 561

1 674

1 807

1 907

1 844 396

1 953 397

1 962 396

2 075 407

2 238 414

2 453 419

2 714 422

2 908 425

1 234 1 302

1 466 1 510

2 131 2 131

2 309 2 252

2 434 2 317

2 377 2 207

2 239 2 029

2 242 1 981

World

Production Consumption Closing stocks – weeks consumption Price LME – nominal – real a

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

Australia kt Mine output Exports kt Ore and conconcentrates kt Refined Total value A$m – nominal A$m – real b

a In 2006 US dollars. b In 2005-06 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Lead Zinc Study group; World Bureau of Metal Statistics; ABARE.

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zinc The most significant of these are the Wuhan Iron and Steel project (capacity 1.24 million tonnes a year, due on line in mid-2006), Taiwan’s Yieh Phui project (900 000 tonnes a year, due in late 2006 ) and the Tangshan Steel project (450 000 tonnes, due in mid-2007). The Baoshan Iron and Steel, Nippon Steel Corp (NSC) and Arcelor joint venture (90 0000 tonnes a year), which commenced production in mid-2005, is also expected to reach full capacity in 2006.

Growth elsewhere less positive The United States is the world’s second largest consumer of zinc. In 2005, US galvanised steel production was cut as large galvanised steel producers destocked. In 2006, a modest rebound in galvanised steel production is expected to support higher demand for zinc. Underpinning this forecast is the assumption that a rebuilding of stocks and ongoing reconstruction work in the southern United States, following hurricanes Rita and Katrina, will offset weaker industrial production growth. Over the medium term, an assumed weakening in the current property cycle in the United States and continued high consumer indebtedness, combined with relatively higher interest rates than in recent years, is forecast to constrain housing construction activity. As a result, the growth in US galvanised steel production is expected to ease, translating through to weaker demand for zinc. In Europe, galvanised steel production is projected to grow modestly over the projection period, in line with relatively modest growth in industrial production. However, within Europe, the location of galvanised steel production is being shifted from west to east. The ongoing trend toward the relocation of a range of manufacturing capacity — especially automobile production — to central and eastern European economies (particularly in the Czech Republic, Hungry, Poland and Slovenia) is expected to result in a modest decline in galvanised steel consumption in western Europe over the outlook period. Furthermore, significantly higher galvanised steel production costs and increasing environmental pressures are expected to result in an increasing proportion of western European galvanised steel demand being met through imports. Reflecting these factors, zinc consumption in western Europe is also projected to ease over the outlook period.

New mine capacity to come on line … but is it enough? Between 2000 and 2003, a significant amount of the world’s zinc mine capacity was closed because of low zinc prices. For example, the now reopened Tara mine in Ireland (180 000 tonnes a year) was closed in 2001, the Polaris mine in Canada (135 000 tonnes a year) was closed in 2002 and Lennard Shelf in Australia (180 000 tonnes a year) was closed in 2003. Furthermore, low prices over this period contributed significantly to a lack of investment in new mine capacity. These factors, coupled with strong demand for zinc concentrates from China, have contributed to the current shortage in concentrates supply. Between 2000 and 2005, world zinc mine production increased by an estimated 951 000 tonnes. Over the same period, global refined zinc production rose by an estimated 1.45 million tonnes, with the balance representing a drawdown of concentrates stockpiles. As world smelting capacity has expanded at a faster rate than the world’s mine supply in recent years, a chronic shortage of zinc mine supply (and concentrates) now exists. This imbalance is currently reflected in low zinc treatment charges — the effective price paid by zinc smelters to convert zinc concentrates into refined zinc — with spot treatment charges reportedly being negative at some refineries in China and India for the first time ever. Significantly lower treatment charges — high feed costs — have resulted in the closure of significant smelting capacity in recent years, especially in developed countries. Major zinc 158

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zinc smelter closures in 2005 included the Portovesme ISF smelter in Italy (70 000 tonnes a year), the Sudamin MHD smelter in Germany (100 000 tonnes a year) and the Auby smelter in France (13 0000 tonnes a year). In 2006, the increase in capacity from new and reopened mines and expansions at existing operations are expected to result in world zinc mine production rising by 3 per cent to 10.1 million tonnes. In 2007 and 2008, production is forecast to rise by a further 5 per cent and 5.5 per cent to 10.6 million tonnes and 11.2 million tonnes respectively. However, a booming mining industry worldwide and current shortages of equipment and skilled labor have resulted in even relatively small brownfield projects being delayed and subject to increased project costs. There are also significant risks to investment and constraints on growth in production capacity over the medium term. These include the depletion of some of the larger known ore bodies; increased pragmatism by major mining companies about further capacity expansions; administrative and financial constraints in some mining companies to running multiple development projects simultaneously; and political risks in investing in new capacity in some regions. By 2011, world zinc concentrate supply is projected to reach 12.6 million tonnes, averaging 4.3 per cent annual growth over the outlook period.

Capacity continues to expand but not production The rampup of smelter capacity opened in 2005 and further expansions to existing capacity are expected to be the main drivers behind growth in world zinc production in 2006. Signifi-

Major additions to world zinc supply capacity Location

Country

Company

Capacity Mt

Projects 2005 Black Star Lanping Rampura Agucha Draa Sfar

Mount Isa, Queensland Nujiang, Yunnan Bhilwara, Rajasthan Marrakech

Australia China India Morocco

Xstrata Yunnan Jinding Zinc Hindustan Zinc Inc Compagnie Miniere de Guemassa Group

Projects 2006 Shaimarden Duck pond Balmat Aljustrel Rubtsovsky

Shaimarden Buchans, Labrador New York Aljustrel Altai

Kazakhstan Canada United States Portugal Russian Federation

Kazzinc Aur Resources Hudbay Minerals Pirites Alentejanas (EuroZinc) JSC Siberia - Polimetal

San Cristobal Northern Sumatra Perkoa Lebel sur Quevillon, Quebec Kimberly, Western Australia

Bolivia Indonesia Burkina Faso

Apex silver mines Corp Herald Resources, PT Aneka Tambang Metrox (Aim Resources)

Canada

Breakwater Resources

Australia

Teck Cominco

180

Iran Pakistan Canada

Union Capital, Itok, IMIDRO, IMPASCO MCC Resources, Pakistan Mineral Dev. Co. Redfern Resources

160 100 50

Canada

Canadian Zinc Group

Projects 2007 San Cristobal Dairi Perkoa Langlois Lennard Shelf Projects 2008 Mehdiabad Duddar Tulsequah Chief Prairie Creek

Yazd, central Iran Duddar, Baluchistan British Columbia Nahanni River, North Western Territories

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65 100 105 40 60 34 60 80 40 215 220 60 54

50

159

zinc cant smelters commissioned in 2005 include the Chanderiya zinc smelter in India (170 000 tonnes a year) and the Lanping and Yugang Zinc smelters in China (both 100 000 tonnes a year). Significant capacity expansions in 2005 include the Chihong smelter in China (additional 50 000 tonnes a year). In 2006 the combination of limited growth in new concentrate supplies and the recent rundown in mine and smelter inventories of zinc concentrates is expected to constrain growth in zinc production. As a result, despite the addition of significant new production capacity, especially in China, world zinc production is forecast to rise by only 3 per cent to 10.7 million tonnes in 2006.

China to dominate medium term outlook for world zinc production Continued strong growth in Chinese demand and high world prices are forecast to result in significant increases in world concentrate production being converted quickly into refined zinc over the medium term. As a result, refined zinc production is forecast to rise strongly in 2008 before production growth moderates over the remainder of the outlook period. By 2011, world refined zinc production is forecast to reach 13.4 million tonnes, resulting from an average growth rate of 4.2 per cent a year over the outlook period. As world smelting production if forecast to become increasingly concentrated in China over the medium term, issues such as power availability and growing environmental concerns (along with concentrate availability) will become increasingly important to the outlook for world zinc production. Power shortages in China were linked to temporary shutdowns at a number of Chinese zinc smelters in late 2004 and 2005, including the Zhuzhou (100 000 tonnes a year), Yinli (100 000 tonnes a year) and Zhuye Orch Metals smelter, China’s second largest zinc producer. While power restrictions resulted in only a few temporary plant shutdowns in 2005, this issue remains a significant risk factor for the medium term outlook, particularly as the Chinese electricity grid is expected to come under increasing pressure from the continued migration of workers to urban areas, particularly in coastal regions. Environmental concerns, especially in relation to plant operating procedures and standards, are also an important risk factor. Increasing environmental standards have the potential to reduce the competitiveness of Chinese zinc producers. Concerns about pollution have recently been emphasised by the closing down (temporarily) of China’s third largest zinc smelter — the Shaoguan smelter (180 000 tonnes a year) — after the release of significant amounts of cadmium into a local river.

Australian exports After rising by an estimated 19 per cent in 2004-05, Australian export earnings from zinc are expected to increase by 46 per cent in 2005-06 to $2.1 billion, reflecting higher export volumes and Australian dollar zinc prices. By 2010-11 Australian export earning are projected to be 7 per cent lower in real terms (2006 dollars) than in 2005-06. Despite production at CBH Resources being disrupted until at least mid-2006, the ramping up of production at the Black Star zinc mine in Queensland (65 000 tonnes a year) is expected to result in Australian zinc mine production rising by 4 per cent to 1.4 million tonnes in 2005-06, and by 5 per cent to almost 1.5 million tonnes in 2006-07. Beyond 2006-07, the assumed reopening of Lennard Shelf in Western Australia (180 000 tonnes a year), combined with the ramping up of production at the newly opened Hellyer metals project in Tasmania (24 000 tonnes a year), Angas Zinc project in South Australia (36 000 tonnes a year) and the Jaguar base metals project in Western Australia (25 000 tonnes a year) will be the main sources of growth in zinc concentrate production. By 2010160

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zinc 11, Australian mine production is forecast to reach 1.9 million tonnes, from an average annual growth rate of 5.9 per cent over the projection period. While Australian production of concentrates is expected to rise strongly over the outlook period, growth in refined zinc production is expected to be a lot slower. After rising by 2 per cent in 2005-06 to 480 000 tonnes, production is expected to rise by 1.5 per cent to 487 000 tonnes in 2006-07. Between 2007-08 and 2010-11, production is forecast rise by an average 0.7 per cent a year to reach 505 000 tonnes in 2011. Australian production of zinc has the potential to be significantly higher by the end of the projection period if Sun Metals decides to proceed with a doubling of existing smelting capacity at its Mount Isa operation. At this stage the Sun Metals project has not been included in the projections.

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wine

> Vince O’Donnell > +61 2 6272 2255 > [email protected]

wine industry strategic global directions and Australian outlook to 2010-11 Roger Rose and Wayne Gordon

> Australia’s wine exports are forecast to rise to 1.3 billion litres in 2010-11, with a value of $4.3 billion. Despite strong growth in demand in Australia’s major export markets, prices are forecast to fall under pressure from abundant world supplies and falling demand in some key European countries. > In response to falling world wine prices and high Australian wine stocks, real prices for Australian white wine grapes are projected to fall to $412 a tonne by 2010-11. The price of red wine grapes is forecast to fall to $399 a tonne by 2006-07 but then to rise as supplies of some grapes tighten, reaching $464 a tonne in real terms by 2010-11.

Vintage 2005 Australian wine grape growers harvested a crop of 1.9 million tonnes in 2004-05, 2 per cent more than the 2003-04 crop. A decrease in yields was compensated for by a 5 per cent expansion of bearing area to 153 000 hectares. Production of red wine grapes fell by 2 per cent, but red grapes still made up the larger proportion of the crop. Production of white wine grapes expanded by 13 per cent to reach 773 000 tonnes. Planting of new vineyards rose by slightly less than 2 per cent in 2004-05 to 5900 hectares. Plantings were dominated by premium white wine varieties, with chardonnay accounting for 69 per cent of total white wine grape plantings and 42 per cent of all wine grape plantings. Shiraz was the only other variety with a large area planted, accounting for 25 per cent of all plantings. Sales of Australian wine in 2004-05 were just under 1.1 billion litres, with 430 million litres sold on the domestic market and 661 million litres exported. Although the export volume grew by 14 per cent in 2004-05, its value grew by only 7 per cent. The unit value of export sales fell by 5 per cent to A$4.16 per litre. In 2004-05 exports accounted for 60 per cent of sales of Australian wine. With only a small growth expected in domestic sales, the Australian industry will become more strongly export focused. Conditions in the Australian industry will, therefore, be mainly influenced by developments in world demand for and supply of wine.

Characteristics of world demand for wine World consumption of wine in 2005 is estimated to have risen by around 1 per cent from the 2004 level. The relatively stable total disguises the long running contrast between rapid growth in consumption in Australia’s main export markets and falling consumption in traditional wine consuming countries. In Australia’s two largest export markets, the United States the United Kingdom, rising incomes and changing preferences and lifestyles continued to fuel 162

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wine increasing demand. Demand for wine also continued to increase in Canada, the Russian Federation, Sweden and a number of emerging wine consuming countries in Asia. Abundant supplies of wine, at falling prices, have further stimulated consumption. However, consumption has continued to fall in the core EU consuming and producing countries, France, Italy and Spain, and also in Argentina. The level and rate of growth in income, the age structure of the population and social customs all influence wine consumption in a country, sometimes, but not always, in a predictable way. For example, Huang (2003), Moran and Nelson (1995) and Andrienko and Nemtsov, (2005) estimate strong positive responses of wine consumption to income for the United Kingdom, United States and the Russian Federation respectively. In the United Kingdom, Lader and Goddard (2004) estimate average weekly wine consumption by men in managerial and professional occupations to be 3.3 times that of men in generally lower income routine and manual occupations. The figure for women is 1.9. Outside traditional consuming countries, it is only with rising incomes and a developing middle class that countries such as Russia and China could have begun to have an impact on the world wine market. Yet knowledge of income levels alone does not allow good prediction of wine consumption. French, Italian and Spanish consumers have persistently cut their wine consumption over several decades of rising incomes. And Angulo, Gil and Gracia, (2001) find that Spanish households are less likely to choose wine as an at home drink the higher is their income and education level. There is some evidence that changes in patterns of drink consumption are part of a process of cultural convergence under the influence of improved global communications and trade. Aizenman and Brooks (2005) find evidence for such convergence between traditional beer drinking nations on the one hand and traditional wine drinking nations on the other. Still, in traditional wine drinking France, beer consumption per person decreased by 17 in the ten years to 2005, at the same time that per person consumption of wine also decreased, by 16 per cent (World Drink Trends 2005). People seem much more likely to be frequent wine drinkers in their mid to later years if they drink some wine in their youth (Wine Market Council 2005, ONIVINS-INRA 2002b, Moran and Nelson 1995). With habit persistence, change may be slow, particularly if new ideas are first picked up by younger generations. So, while an expectation of some degree of convergence seems reasonable, it is not sufficient to predict trends in drinking behavior in the short to medium term. For example, in Japan, a long period of both high incomes and exposure to western goods and habits was insufficient to induce consumers to adopt wine as a preferred drink. Only very recently has Japanese United Kingdom wine consumption wine consumption increased significantly, and then to a low average annual consumption per person level only. In most wine drinking populations those aged 35–65 30 drink more per person than do younger or older people. 25 The pattern for the United Kingdom is illustrated in figure A. Similar patterns are evident for the United States (Wine Market 20 Council 2005a and Vincor International 2005) and France 15 (ONIVIN-INRA 2002b). Such patterns mean that knowing the number of people in the older cohorts is often sufficient 10 for short term prediction of wine consumption. For a longer 5 term view, though, both the number of young people and the proportion who drink wine now is critical to future levels of L consumption. It is not just that these young people will fill the 14–24 25–34 35–44 45–54 55–64 65+ older cohorts in the future. age group

A

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wine Demographic structures vary greatly between major wine consuming countries. So do current and prospective incomes, the responsiveness of wine demand to income change and a number of cultural and taste factors. For those reasons it is most useful to consider the major consuming countries or regions separately.

Wine demand in major consuming countries and regions, 2005–11 United Kingdom Demand for wine in the United Kingdom continues to grow strongly. In 2004-05 the quantity of imported wine released from bond for domestic consumption increased by 6 per cent, continuing the rapid growth of recent years (Wine and Spirit Trade Association 2005). The United Kingdom maintained its position as Australia’s largest export market, with the volume of exports in 2004-05 increasing by 16 per cent over the previous year’s level. Although sales of Australian wines on the British market increased across all price points, the average unit value of exports fell by 4 per cent. This may reflect the fact that recent increases in export volumes have been concentrated largely in the off-trade (sales off licensed premises), rather than the potentially higher Wine sales in the United Kingdom margin on-trade (Boothman 2005). Compared with growth percentage change 2003-04 to 2004-05 in the off-trade, growth in sales of Australian wine in the onoff-trade trade was small. Sales of French and Italian wine continued France on-trade to fall. Wines from the United States and Chile experienced the greatest percentage increases, although each came from Australia a lower base than that of Australian wine (figure B). Over the medium term, capturing a greater share of the onUnited States trade may become increasingly important, for two reasons. First, continuing retail consolidation is expected to produce Italy a further tightening of margins on wine sold to supermarket chains and increased competitive pressure on specialist wine Chile retailers. Second, as incomes increase over time, opportu–15 –10 –5 % 5 10 15 20 nities for sales in restaurants and other on-trade outlets will increase. In particular, Halstead (2003) forecasts that young single people and couples without children will eat out more often and spend more on wine. The change in 2005 to less stringent opening hours for licensed premises is expected to expand the number of out of home drinking opportunities. Over the medium term, increasing acceptance of wine as a drink for a range of social occasions, supported by increasing incomes, is expected to ensure continued growth in wine consumption. Wineintelligence forecasts that wine consumption in 2015 will be 33 per cent above the 2005 level (Halstead 2005). That forecast depends on an assumed increase in consumption per wine drinker and an increase in the proportion of the population who drink wine. The prospective number of wine drinkers will be constrained by the relatively small group of young adults in Britain’s aging population. Estimated on the basis of United Nations population projection, the increase in the drinking age population in the United Kingdom will be less than 5 per cent over the outlook period (United Nations 2005). Wineintelligence also assumes an upper limit of 70 per cent of the proportion of the population who will ever drink wine. Approximately 20 per cent do not consume alcohol.

B

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wine United States Wine consumption per person in the United States reached 10.4 litres in 2005, up 9 per cent from the 2003 level (World Drink Trends 2005), continuing the strong growth begun in the mid-1990s. Wine is increasingly being adopted as an appropriate drink at home and in restaurants by large numbers of consumers. Research commissioned by the Wine Market Council (2005b) showed an increase of 32 per cent in the number of regular wine drinkers in households with income above US$35 000 between 2000 and 2003. Wine is increasingly being drunk by the generation born between 1977 and 1998 (almost half of whom are now of legal drinking age) as well as the ‘baby boomers’, many of whom have long been wine consumers. The increase in wine consumption in the United States has come largely at the expense of beer and spirits consumption, rather than as part of an increase in total alcohol consumption per person. Rising incomes and the availability of bargain wines and attractively priced popular premium imports have encouraged increased consumption. There is clearly also a change in preferences underlying the widespread acceptance of wine. Two commonly suggested contributors to that change are the level of advertising expenditures and the reputed health benefits from wine consumption (Wine Market Council 2005a, Research and markets 2005). The reported health benefits of moderate wine consumption appear to have played a part in that change. In a survey by the Morefocus Group (2005), 86 per cent of respondents agreed that ‘... red wine drunk in moderation, is beneficial to health ...’ and 22 per cent said that they drink more red wine as a result of that belief. On the other hand, it is questionable whether advertising has an influence on total wine consumption, as opposed to brand choice. Research by Larivière, Larue and Chalfant (1995) and Moran and Nelson (2000) indicates that the level of advertising for alcoholic drinks in north American markets influences the distribution of market shares between brands of wine, beer and spirits. They find that advertising has little effect on the overall level of consumption of each category of drink, or on total consumption of alcohol. These findings suggest that increases in wine consumption are more likely to be generated by increases in the adult population, increases in income and in preference change associated with broader lifestyle changes than by industry generated efforts. The great diversity of quality and unit price of wine leaves open the possibility that rising incomes and increasing familiarity with wine will induce consumers to spend more, but do so by buying higher priced wines rather than buying greater quantities. Something like that is certainly evident in the Exports of Australian wine to the tendency of French consumers to upgrade the quality of wine United States average unit value groups they consume while cutting per person consumption (Auriol, Lesourd and Schilizzi 2002). Vincor International (2005) under $2.50 forecasts a shift in US wine consumption toward higher priced wines, with the greatest percentage growth in sales in the $2.50–4.99 ultra premium ($15–20 per bottle) and specialty (greater than $20 per bottle) categories. $5.00–7.49 If that change eventuates, there is some question about the degree to which Australian wine makers will be able to $7.50–9.99 benefit. Unit values of Australian exports to the United States have been consistently higher than those to some other major over $10.00 markets. In 2004-05, however, exports to the United States at higher price points fell (figure C). –60 –50 –40 –30 –20 –10 % 10 20 30

C

percentage change in volume 2003-04 to 2004-05

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wine Over the medium term, growth in the wine consumer base, particularly in the number of regular drinkers, is expected to continue the increase in average per person consumption. In a report prepared for Winexpo 2005, the International Wine and Spirits Record forecast consumption of still, light wine in 2008 to be 28 per cent above the 2003 level, making the United States the world’s largest consumer (Beverage Industry 2005). On the basis of United Nations (2005) population projections, growth in the United States drinking age population is expected to be a little under 5 per cent over that period. That means that growth in average consumption per adult must be around 23 per cent for the forecast to be realised. It is worth noting, though, that only 57 per cent of adult Americans drink alcohol (Wine Market Council 2005), compared with 80 per cent of Britons (Halstead 2003). America’s long temperance history means that most of the 43 per cent who do not drink are unlikely to change. Ultimately, the pool of potential wine drinkers is constrained, although this may not be sufficient to slow the growth in wine consumption within the outlook period.

France, Italy and Spain — the core EU producers In contrast to the strong growth in wine consumption experienced in US and UK markets, there has been a long, unbroken, decline in wine consumption in the three main European producing countries. In France, average wine consumption per person 15 years and older has declined from 160 litres in 1965, to 70 litres in 2005 (ONIVINS 2005). Fewer French people are drinking wine and those who drink it are drinking less often. In 1980, 81 per cent of people 15 years and older drank wine at some time (ONIVINS 2005), with 51 per cent being regular drinkers (ONIVINS-INRA 2002a). By 2005, only 62 per cent of adults drank wine at all, with less than 21 per cent being regular wine drinkers. The decline in average per person wine consumption in France is expected to continue, at least over the medium term. Since 1990, well below 50 per cent of people aged 19–24 have been wine drinkers (ONIVINS-INRA 2002b). The proportion of that age group who were regular drinkers fell from 24 per cent in 1980, to 9 per cent in 1990 and 4 per cent in 2000. All of the French population below the age of 40 are now from those lower drinking age cohorts. A similar pattern of decline is evident in Italy and Spain. Between 1995 and 2005 wine consumption per person fell by 17 per cent in Italy and 15 per cent in Spain (World Drink Trends 2005). Over the forecast period, growth in the adult population will be less than 2 per cent in France and near zero in Italy and Spain. Total wine consumption is expected to continue to decline. The importance of demand conditions in France, Italy and Spain lies not in the potential of those countries as markets for Australian wine. Rather, it lies in the sheer size of consumption and production in those countries, with the three accounting for almost 30 per cent of world consumption and 50 per cent of world production, and thus in the impact that any changes in those countries has on their net export potential.

Germany In recent years, per person consumption of wine in Germany has risen steadily to 25 litres, close to the highs of the 1980s (World Drink Trends 2005). In 2004-05, around 62 per cent of German wine consumption was sourced from imports, making Germany the world’s largest wine importer (USDA Foreign Agricultural Service 2005b). German vineyards, while not expanding, are steadily being replanted to premium varieties, with a greater emphasis on red grapes. Growth in wine consumption in Germany has been constrained by persistently slow economic growth and high unemployment. Over the medium term, the German market is 166

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wine expected to grow moderately only, given subdued economic growth and an aging and almost static population. The German market will continue to be an outlet for lower priced wine, with discount outlets dominating sales (USDA Foreign Agricultural Service 2005b).

Russian Federation The Russian Federation is one of the most rapidly growing markets for wine in the world. For a significant section of the Russian population, increasing incomes provide an opportunity to substitute wine, beer and high quality vodka for moonshine and other low quality spirits (Andrienko and Nemtsov 2005). Historically, as much as 70 per cent of Russia’s demand for wine was satisfied by imports from Moldova (Beverage Daily 2004). Increasingly, though, the Russian Federation is importing wine from EU countries (Vinitaly 2005), from the United States and other new world producers (USDA Foreign Agricultural Service 2005a). While Russia is not currently an important outlet for Australian wine, its impact on total world demand for wine is important. Over the medium term Russia’s demand for wine is expected to continue to increase strongly, given continuing economic growth. USDA Foreign Agricultural Service forecasts a 20 per cent increase in Russia’s imports to 2009. Ultimately, though, Russia’s aging and declining population will place a limit on its market potential.

Emerging Asian markets High incomes and a propensity for its consumers to adopt many other western products have meant that Japan has long been viewed as a prospective wine market. The reality has been consumption fluctuating around a low level. A rise in consumption over recent years may auger well for future import demand, though. Per person consumption almost doubled between 1995 and 2003 (World Drink Trends). One aspect of Japan’s demography may enhance the demand for wine in the medium term, though. Shoji (2004) notes that interest in wine is increasing among the large number of single women in their thirties. Yet, over the long term, the aging of Japan’s population can be expected to work against increasing wine consumption. A large and expanding middle class, with rapidly rising incomes, gives China appeal as a potential market for wine. Wine consumption per person has doubled over the past five years (Kissel 2005). Even with consumption at just 0.3 litres per person, the size of China’s population is sufficient to provide a large market. Much of China’s import demand in recent years has been filled by bulk wine from Chile, at around $0.85 per litre (Heijbroek 2005), although Vetumne International and Associés (2004) suggest that opportunities exist for sales of imported bottled wine. They argue, however, that establishing brand recognition and competing with the price of domestic wine will not be easy. China has over 500 wineries, some quite large (USDA Foreign Agricultural Service 2005c). Joint ventures with international wine companies, such as Remy Cointreau, provide an avenue for improving vineyard and winery management and thus both wine quality and efficiency. Both the potential for market growth and the marketing challenges experienced in Japan and China are exhibited more broadly through India and south east Asia. Growing populations and increasing consumer incomes will provide potential markets. Yet, none of those populations have a tradition of wine consumption. Over the outlook period, they seem more likely to provide limited markets for wine carefully targeted at particular consumer groups and consumption occasions than to provide an outlet for large quantities of wine made for traditional markets.

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wine

Overall prospects for world wine consumption The medium term prospects for world demand for wine are for a small, steady, increase in total demand for wine. The decline in consumption in France and other traditional wine consuming countries is expected to be more than offset by increasing demand in newer consuming countries. The United States and United Kingdom are expected to account for much of the increase in consumption. Other countries in which continued strong consumption growth can be expected include Canada, the Netherlands, Ireland and Sweden. Datamonitor (2006) estimates that the greatest rate of growth in wine consumption in Europe to 2008 will come from Scandinavia and eastern Europe. Wine consumption patterns in Canada, Australia’s third largest export market, have followed those in the United States. Datamonitor (2006) forecasts a 5.3 per cent increase in consumption in Europe, which accounts for the bulk of the world market, from 2004 to 2009. That seems consistent with the OIV forecast of a 2007 consumption level around 3 per cent above the 2005 level (Castellucci 2005). Given continued strong growth in north American and emerging markets in the Russian Federation and Asia, the realisation of that projected growth could result in total growth in the world market around 7 per cent by 2010. However, such growth may be negatively affected by the decline in wine consumption in traditional EU consuming countries and by the risks to continued growth in Australia’s major export markets. There are two evident risks to the prospects for continued growth in consumption, particularly in the United States and United Kingdom. One is the ever present risk that wine drinking across the board will be depressed by new or extended campaigns to reduce the harm from alcohol consumption. On the surface, the United Kingdom’s higher and increasing average per person consumption of alcohol might be most likely to draw attention. However, a much higher proportion of abstainers in the United States population means that average per person consumption figures underestimate consumption per drinker. A second risk concerns the evidence of health benefits from moderate consumption of red wine. As is noted above, the Wine Market Council (2005) found this information to have a positive influence on red wine consumption. Halstead (2003) reports a similar finding for the older groups in a United Kingdom survey panel. Any less than positive future finding on the health issue might, therefore, depress red wine consumption to some extent.

World wine production World wine production fell by approximately 6 per cent in 2005, principally the result of lower yields from major EU producing countries. Production in the EU 25, which accounts for 65 per cent of world production, was down 12 per cent to 17.3 billion litres (European Commission 2006). A good harvest in California and small increases in output in Chile, Argentina and New Zealand ensured that total production in the ‘new world’ wine producing countries increased from the 2004 level. The increase, however, compensated for less than a third of the decrease in output in the European Union. Hot, dry conditions in Spain contributed to a 21 per cent fall in that country’s crop. Yields were down in France, Italy, Germany, Portugal and a number of the small EU producing countries. Among the ‘new world’ producers, good seasonal conditions resulted in a near record crop for in California, 14 per cent above the 2004 level. Argentina’s vintage was also boosted by favorable weather. Similarly favorable conditions and expanded bearing area also produced larger crops in Chile and New Zealand. However, poor seasonal conditions in South Africa resulted in the crop falling by 11 per cent from the 2004 level.

168

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wine A season of average yields across the EU 25 in 2006 would result in a vintage around 2.0 billion litres more than the 2005 vintage, given no change in bearing areas. Until very recently, the area of EU vineyards had been shrinking. Grubbings appear to have stalled for now, except for areas reworked under the very generous EU funded replanting scheme. With average seasonal conditions, total 2006 production in ‘new world’ wine producing countries is expected to be around 800 000 litres below the 2005 level. That would give a level of world production around 1.2 billion litres, or less than 1 per cent, above the 2005 level. EU policy and the responses of EU producers to that policy and to price and other signals from the world market will be critical over the outlook period. Key elements of current EU policy, in this regard, are ‘crisis distillation’ and subsidised restructuring. Crisis distillation provides an outlet for surplus wine, with an effective floor price. It removes the risk of a zero return from the market and raises the average return to marginal producers. Under the restructuring provisions, large areas of vines have been grubbed and replaced by new plantings, with the EU government bearing half the cost of conversion. Between 2000-01 and 2004-05, 341 000 hectares were restructured (USDA Foreign Agricultural Service 2004, European Commission 2005a). The vast bulk of those replantings was in France, Spain and Italy. A stated aim of providing restructuring aid is to reorientate production to match consumer demand (European Commission 2005b). In other words, replantings involve vineyard layout and varietal selection designed to produce quality wine. For example, the bulk of Spanish replantings have involved replacement of high yielding low quality varieties with tempranillo, Spain’s classic red grape, and other high quality varieties such as cabernet sauvignon (USDA Foreign Agricultural Service 2004). Almost all of the vineyards replanted to date are either bearing now or will be bearing at some time during the outlook period. The quest for better quality in the replanting process may mean lower yield, although that is not guaranteed in aggregate (Agrain 2005). It will, however, give rise to replacement of low quality wine with higher quality product from an area of vineyard more than twice Australia’s total. Over the medium term, growth in output from the ‘new world’ wine producers is expected to be subdued. In the United States, the largest of those producers, vineyard area appears to have stabilised. In 2004 the bearing area of wine grapes fell by 1.3 per cent (California Agricultural Statistical Service 2005). Nonbearing area fell by 20 per cent, reflecting the cut in plantings started in 2002. Within the total area, however, there is a continuing reorientation toward quality red varieties, with cabernet sauvignon, shiraz, merlot and pinot noir areas expanding rapidly. The Chilean industry has a similar orientation toward quality red grape varieties, but also has a substantial area of vineyards yet to come into production (USDA Foreign Agricultural Service 2005d). There has been a small expansion in Argentina’s vineyard area since 2000 (Instituto Nacional de Vitivinicultura 2005). OIV forecasts world production in 2008 at 29 billion litres (Castellucci 2005). That would make the vintage approximately 5 per cent larger than the 2005 crop. Further maturation of replanted vineyards in the European Union and new vineyards in ‘new world’ producing countries could result in a further 2–3 per cent growth in total production potential by 201011. The cumulative impact of several years of low prices may work against higher production being realised, though. Given around 7 per cent growth in world consumption over the outlook period, some easing of the downward pressure on prices may be evident by 2010–11.

Outlook for Australian wine grape prices Prices for Australian wine grapes are expected to fall for the 2005-06 vintage, in response to lower export prices and high wine stock levels (figure D). The Australian white wine indicator

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wine price is forecast to fall to $522 per tonne, down from $555 in 2004-05. For red grapes, the Australian indicator price is forecast to fall 5 per cent to $413 per tonne. For white wine grapes the real price is forecast to continue falling to 2010-11. Growth in demand and tighter supplies for red wine grapes are expected to result in an rise in the real price before the end of the outlook period. After dipping to a low of $399 per tonne in 200607, the price for red wine grapes is forecast to rise to over $460 per tonne by 2010-11.

Australian wine production 2006 vintage Good winter rainfall in most major producing regions and favorable spring weather conditions established the basis for an above average crop. Yield is expected to be lower than in 2004-05, but higher than average. With an increase in bearing area to 157 000 hectares, production in 2005-06 is forecast to be around 1.92 million tonnes, just 1 per cent below the 2004-05 level. Hot weather throughout South Australia and Victoria during January 2006 limited yield potential. Output of red wine grapes is forecast to fall slightly to 1.05 million tonnes, mainly as a result of a 9 per cent fall Australian wine grape prices in merlot production. Shiraz is forecast to remain the highest tonnage variety at 435 000 tonnes, little changed from 2004-05. Output of chardonnay is forecast to increase by Red 1250 5 per cent, as a result of an 8 per cent expansion in bearing area. Production of most other premium white wine grape 1000 varieties is forecast to decline, with yields down on 2004-05 levels. Total production of white wine grapes is forecast to be 750 778 000 tonnes, marginally higher than in 2004-05.

D

White

500

Australian wine grape plantings

250 2005-06

A$/t

1992 1995 1998 2001 2004 2007 2010 -93 -96 -99 -02 -05 -08 -11

of selected premium wine grape varieties E Plantings Australia

4000 Shiraz

3000 2000

Cabernet sauvignon

1000

Riesling

Chardonnay

ha 2000 -01 170

2001 -02

2002 -03

2003 -04

2004 -05

Between 2000-01 and 2004-05, annual plantings of wine grapes fell by 27 per cent to around 5900 hectares. The fall almost entirely reflected reduced plantings of red wine grapes. Plantings of shiraz fell proportionally less than those of other red wine grapes, and by 2004-05 shiraz accounted for 63 per cent of total red grape plantings. Plantings of chardonnay increased by over 330 per cent to 2477 hectares in 2004-05, accounting for 69 per cent of total white wine grape plantings (figure E). In response to the same price pressures that have constrained wine grape plantings, there has been an increase in grubbings. Total grubbings in 2004-05 were 4270 hectares, up 18 per cent on the 2003-04 level. Relative to total planted area of the varieties, grubbings were particularly high for nonpremium white and red grapes and for cabernet sauvignon. Taking into account both plantings and grubbings, there was a net increase in the area planted to wine grapes, with the largest increase in areas under shiraz and chardonnay. Over the outlook period, the bearing area of wine grapes australian commodities > vol. 13 no. 1 > march quarter 2006

wine is forecast to continue to expand slowly, to be 163 000 hectares in 2010-11, up by 4 per cent. The growth is expected to be dominated by an 18 per cent increase in the area of chardonnay to 33 000 hectares. Increases in the areas of sauvignon blanc and riesling account for much of the remainder. The bearing area of red wine grapes is forecast to remain around 98 000 hectares.

Australian grape production Total Australian production of wine grapes in 2010-11 is forecast to be around 1.95 million tonnes, 1.5 per cent above the estimated 2005-06 level. Production of premium white wine grapes is forecast to increase by 10 per cent to 812 000 tonnes. An increase in production of chardonnay, to 500 000 tonnes, is expected to account for 84 per cent of the total increase in premium white wine grape production. Increased output of sauvignon blanc, to Australian production of major premium 49 000 tonnes, is forecast account for a further 15 per cent wine grape varieties of the overall increase. Production of all non premium white 2005-06 2010-11 change wine grape varieties is forecast to decline, resulting in an 8 kt kt % per cent increase in total white wine grape production to 944 Chardonnay 435 500 15 000 tonnes in 2010-11. Colombard 81 75 –6 Output of red wine grapes is forecast to fall by 4 per cent Riesling 40 42 6 by 2010-11. Some cutback in production is forecast for all but Sauvignon blanc 37 49 32 shiraz and pinot noir. Output of shiraz is forecast to increase Semillon 97 96 –1 by 3 per cent to 449 000 tonnes. Pinot noir production is Premium white 735 812 10 forecast to increase by 2 per cent to 41 000 tonnes. On the Cabernet sauvignon 305 273 –10 other hand, production of cabernet sauvignon is expected Merlot 133 127 –4 to fall by 10 per cent to 273 000 tonnes, accounting for Shiraz 438 449 3 much of the reduction in total tonnage. Production of merlot is Premium red 981 941 –4 forecast to be down 4 per cent to 127 000 tonnes. Produc-

Australian wine grapes outlook

Bearing area

Unit

2003 -04

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

’000 ha

146

153

157

160

162

163

163

163

kt kt kt

1 093 683 119

1 071 773 94

1 050 778 94

1 021 793 88

1 015 820 84

1 015 832 86

1 009 838 87

1 004 843 88

kt

1 895

1 937

1 921

1 902

1 919

1 932

1 934

1 935

ML

581

661

749

859

971

1 083

1 191

1 291

A$m A$m

2 545 2 684

2 750 2 831

2 959 2 959

3 236 3 157

3 552 3 381

3 902 3 623

4 329 3 922

4 893 4 325

669 705 501 529

555 571 434 447

522 522 413 413

501 489 409 399

481 458 421 400

471 437 438 406

466 423 473 428

466 412 525 464

Wine grape production s Red wine White wine Multipurpose Total Wine exports Volume Value – nominal – real a

Australian weighted average price A$/t White wine A$/t – real a A$/t Red wine A$/t – real a

a In 2005-06 Australian dollars. s ABARE estimate. f ABARE forecast. z ABARE projection. Sources: ABS, International Trade, electronic data service, cat. no. 8504.0; Australian Wine Export Council; Australian Wine and Brandy Corporation, Approved Wine Shipments, Adelaide; ABS, Australian Wine and Grape Industry, cat. no. 1329.0; ABARE.

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wine tion of other premium red wine grapes is forecast to fall by 12 per cent or more and output of nonpremium red wine grapes is projected to fall by 17 per cent.

Wine sales outlook Sales of Australian wine reached just over 1091 million litres in 2004-05, with a value of $5.1 billion. Domestic sales accounted for 430 million litres, with exports reaching 661 million litres. The swing to bottled wine continued, with increases in sales of wine bottles of less than 2 litres increasing by 10 per cent for red wine and 6 per cent for white wine. Sales of wine in soft packs and other containers continued to fall. Total domestic wine consumption is projected to reach 514 million litres by 2010-11. Annual wine consumption per person is expected to rise slightly from just under 23 litres to 24 litres. Sales of Australian wine on the domestic market are expected to increase by 14 per cent to 490 000 tonnes. It is expected that Australian consumers will increasingly favor bottled wine over the outlook period. In 2004-05, Australian wine imports were 22.1 million litres, worth $188 million. The unit value of $8.52 was around 6 per cent above that for 2003-04, as Australian consumers continued to purchase significant quantities of relatively high priced sparkling wine from France. The volume of imports is forecast to remain close to the 2004-05 level over the next five years.

Wine exports Exports of Australian wine were a record 661 million litres in 2004-05. Growth in still red wine represented 68 per cent of the total increase. The rate of growth in bulk red wine exports was stronger (18 per cent) than was that for cask and bottled red (14 per cent overall). Exports of bulk white wine grew by 24 per cent, well above the 9 per cent increase across the other two white wine categories. The unit value of all red wine exports fell by 6 per cent and that for white by 5 per cent. The volume of exports rose for all price points below $7.50 per litre. There was a 25 per cent fall in volume of wine for $7.50–9.99 and a 3 per cent fall in volume for wine above $10. Those falls were almost entirely a result of cuts in exports at those price points to the United States. Exports of wines at those higher price points to the United Kingdom, Germany and New Zealand continued to increase. Exports in 2005-06 is forecast to reach 749 million litres, 13 per cent above the 2004-05 level, with an expected value of $2.96 billion. Unit values of exports are forecast to fall across all Australia’s major markets, with the average unit value down almost 3 per cent at $3.95 per litre. Over the outlook period, exports are forecast to continue to expand, to reach 1.29 billion litres, with a value of $4.32 billion, by 2010-11. Up to 2008-09, unit values of exports are forecast to continue to fall. Beyond that, tightening of both domestic and international supplies for some varieties is forecast to give rise to a modest increase in the average export price.

International demand and the composition of domestic supplies As part of the National Utilisation Project coordinated by the Australian Wine and Brandy Corporation, estimates of expected and preferred intake of wine grapes are obtained through a survey of wineries. Estimates of wineries’ preferred intake are available for the 2005-6 to 2007-08 crops. Those estimates can be compared with ABARE forecasts of production for the ‘cool climate’ and ‘warm climate’ aggregates of regions. 172

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wine Broadly, there are two outstanding differences between wineries’ preferences and forecast availability. First, cool climate supplies are forecast to be in excess of wineries’ preferred intake from those regions for most premium grapes in all years. In particular, cabernet sauvignon supplies are forecast to be around 20 per cent above wineries’ preferred intake in each of the three years. Essentially the same is true for chardonnay, although the gap between preferred intake and forecast availability is less. On the other hand, forecast supplies are persistently below wineries’ preferred intake for riesling and most premium red grapes from warm regions. The gap is particularly for shiraz, merlot, cabernet sauvignon and riesling by 2007-08. The available division of winemakers’ preferred intake between ‘warm climate’ and ‘cool climate’ aggregates provides limited information, especially given the great diversity of climate, soil and aspect combinations included in the cool climate aggregate. In practice, the market requirements underlying the wineries’ responses are likely to be highly specific in terms of flavor, style and price. Grapes from some vineyards in areas falling into the ‘cool climate’ aggregate may remain in strong demand. Nevertheless, the differences between broadly defined preferences and availability do indicate a marked demand to reorientate grape supplies away from some cool climate supplies.

References and data sources Agrain, P. 2005, ‘World vitivinicultural economic data available as at 30 September’, OIV (www.oiv.org). Aisenman, J. and Brooks, E.L. 2005, Globalization and taste convergence: the cases of wine and beer, Santa Cruz Centre for International Economics, University of California, Santa Cruz, 1 March. Andrienko, Y. and Nemtsov, A. 2005, Estimation of individual demand for alcohol, Economic Research Network Russia and CIS, Working Paper no. 05/10, Moscow. Angulo, A.M., Gil, J.M. and Gracia, A. 2001, ‘The demand for alcoholic beverages in Spain’, Agricultural Economics, vol. 26, no. 1, pp.71-83. Auriol, E., Lesourd, J-B, and Schilizzi, G.M. 2002, ‘The future of the French wine industry: globalization and quality effects’, Oenométie IX, Montpellier, pp.1–12. Australian Bureau of Statistics 2005, Australian Wine and Grape Industry, cat. no. 1329.0, Canberra (and previous issues). —— 2005, Sales of Wine and Brandy by Wine Makers, cat. no. 8504.0, Canberra. Australian Wine Export Council 2005, Wine Export Approval Report, Year ending June 2005, Adelaide (and previous issues). Beverage Daily 2004, ‘Moldova facing Russian crisis’, 18 April (www.beveragedaily.com). Beverage Industry 2005, ‘State of the industry: wine and spirits continue to soar’ (www. bevindustry.com). Boothman, P. 2005, The UK market: breaking out of the pigeon hole, Presentation to the Wine Industry Outlook Conference, Creating the Competitive Advantage, Adelaide Convention Centre, 24 November. Californian Agricultural Statistical Service 2005, California Grape Acreage Report 2004 (www.nass.usda.gov). Castellucci, M.F. 2005, Statistics Mondiales Paris 2005, OIV (www.oiv.org). Datamonitor 2006, Wine in Europe: Industry Profile (www.datamonitor.com). European Commission 2006, Report on the Wine Sector: January 2006, Brussels (www. europa.int.eu). —— 2005a, Restructuring of Vineyards, Brussels (www.europa.int.eu). —— 2005b, CAP Reform: the Wine Sector, Brussels (www.europa.int.eu). australian commodities > vol. 13 no. 1 > march quarter 2006

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wine Halstead, L. 2005, The 2015 wine consumer behaviour model, Presentation to the OLN Conference: Wine in 2015, London, 6 April (www.wineintelligence.com). Halstead, R. 2003, Living wine: the influence of lifestyle and life stages on wine drinking in the UK, Presentation to Vinexpo 2003, Bordeaux, 22–24 June (www.wineintelligence.com). Heijbroek, A. 2005, International wine outlook, Presentation to the Wine Industry Outlook Conference, Creating the Competitive Advantage, Adelaide Convention Centre, 24 November. Huang, C-D. 2003, Econometric Models of Alcohol Demand in the United Kingdom, Government Economic Service Working Paper no. 140, HM Customs and Excise, London. Instituto Nacional de Vitivinicultura 2005, Estadísticas (www.inv.gov.ar). Larivière, E., Larue, B. and Chalfant, J. 2000, ‘Modeling the demand for alcoholic beverages and advertising specifications’, Agricultural Economics, vol. 22, pp. 1147–62. Lader, D. and Goddard, E. 2004, Drinking: Adults’ Behaviour and Knowledge in 2004, Office for National Statistics, London. Moran, J. and Nelson, J. 1995, ‘Advertising and United States alcohol beverage demand: systemwide estimates’, Applied Economics, vol. 27, no.12, pp. 1225–37. Morefocus Group Inc 2005, ‘US consumer attitudes to wine consumption changing rapidly’ (www.morefocus.com). ONIVINS 2005, ‘La consommation du vin en France en 2005: résultats provisoires’, Conférence de Presse SITEVI 13’, 15 September (www.onivins.org.fr). ONIVINS-INRA 2002a, ‘Diversité des comportements individuels de consommation de vin en France et scénarios d’évolution du marché’, INFOS no. 93, May, Paris and Montpellier. —— 2002b, ‘Enqête ONIVINS INRA sur la consommation du vin en France en 2000’, INFOS no. 91, Paris and Montpellier, March. Researchandmarkets 2005, Wine in the United States (www.researchandmarkets.com/reports). Shoji, S. 2004, ‘Women hold the key to the Japanese market’, Wine and Vines, November (www.wineandvines.com). United Nations 2005, World Population Prospects: the 2004 Revision Population Database (esa.un.org). USDA Foreign Agricultural Service 2005a, Russian Federation Wine: Wine Market Brief 2005, GAIN Report no. RS5306, Moscow. —— 2005b, Germany Wine Annual 2005, GAIN Report no. GM50044, Berlin. —— 2005c, China, Peoples Republic of: Wine Shanghai Wine Brief 2005, GAIN Report no. CH5808, Shanghai. —— 2005d, Chile Wine Annual 2005, GAIN Report no. CI5011, Santiago. —— 2004, Spain Wine Annual 2004, GAIN Report no. SP4031, Madrid. Vetumne International & Associés 2004, The Chinese wine market: opportunities and threats, Paper presented at the London International Wine and Spirits Fair, London, 18–20 May. Vincor International 2005, Investor presentations: September 30 2005 (www.vincorinternational.com). Vinitaly 2005, The world of wine in figures, 4 April (www.vinitaly.com). Vitisphere 2005, Economie (www.vitisphere.com). Wine and Spirit Trade Association 2005, WSTA Wine Data Sheet October (www.wsta. co.uk/english2/statistics.html). Wine Market Council 2005a, Research summary (www.winemarketcouncil.com). —— 2005b, Research data (www.winemarketcouncil.com). Wines of South Africa 2005, 2005 wine grape harvest about quality, not quantity, 17 June (www.wosa.co.za). Wittwer, G. and Rothfield, J. 2006, The Global Wine Statistical Compendium 1961 to 2004, Australian Wine and Brandy Corporation, Adelaide. 174

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> Peter Gooday > +61 2 6272 2138 > [email protected]

economic status of fisheries better times ahead for Australian producers Paul Newton, Roslyn Wood, Stephanie Szakiel, Leanna Tedesco and Peter Gooday

> World wildcaught production is likely to remain steady over the medium term, but continued growth in world aquaculture is expected. > Australia is forecast to produce $2.15 billion of fisheries products in 2005-06, of which around a third is expected to be aquaculture. For the same year, Australian edible seafood exports are forecast to rise to $1.6 billion. > A forecast fall in the price of oil and an assumed depreciation of the Australian dollar over the medium term will reduce costs and increase revenues.

wildcaught and aquaculture A World production 125 aquaculture production

100 75

World fisheries World production and trade continue to rise

25

World fisheries production rose by 0.3 per cent in 2003 to a new record of 146.3 million tonnes (figure A; FAO 2005b,c). The contribution of aquaculture to world fisheries production continues to grow both in absolute terms and relative to wildcaught production — in 2003 it accounted for 37 per cent of total world fisheries production. It also remains the world’s fastest growing animal food producing sector (FAO 2004). Fish products contributed almost 50 per cent of total aquaculture production, followed by crustaceans and molluscs (28 per cent) and aquatic plants (23 per cent). In 2003, wildcaught production fell by 3 per cent to 91.5 million tonnes, mostly reflecting a decline in the manufacture of fishmeal. The stable path of wildcaught production over the past ten years gives weight to the Food and Agriculture Organisation’s (FAO) view that marine wildcatch fisheries globally have reached their potential. However, better fishing techniques and increased demand for fisheries products have probably reduced the volume of discarding, and therefore the aggregate amount of fish mortality. Still, the FAO classified 24 per cent of the world’s main fish stocks as overexploited

Mt

australian commodities > vol. 13 no. 1 > march quarter 2006

wildcaught production

50

1991

1994

1997

2000

2003

Box 1: Effects of the tsunami of December 2004 The tsunami of December 2004 devastated coastal communities in Asia and Africa, causing significant injuries and loss of life, as well as destroying the assets and means of livelihood of millions. FAO reports that there were at least 60 000 deaths in the fishing industry and that over 110 000 fishing vessels were destroyed or damaged (FAO 2005a). Onshore and offshore infrastructure such as aquaculture operations and ports were also severely affected. International aid organisations are working to re-equip fishers with boats and gear, and to rebuild facilities. The impact of the tsunami on world fisheries production will be made clear when the FAO releases 2005 world fisheries production figures in 2007.

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fisheries

B

World exports of fisheries products Other Fishmeal Crustaceans and molluscs Fish

60 50 40 30 20 10 2005

US$b 1978

1983

1988

1993

1998

2003

export price for fish in various C World forms Dried, salted, or smoked fish 6

4 Canned fish 2 Fresh, chilled or frozen fish 2005

or worse in 2003. Approximately half are fished at close to sustainable levels (FAO 2004). Preliminary FAO estimates suggest that per person consumption of seafood increased by 0.1 kilograms to 16.3 kilograms in 2003, mostly because reported production in China continued to outpace China’s population growth. In the rest of the world, consumption has been stable at 13.2–13.3 kilograms for the past six years. Still, global consumption of seafood has doubled since 1973, as developing countries experience rapid levels of economic growth. Almost threequarters of fisheries production was used for human consumption in 2003. The remainder was used mostly in the production of fishmeal and oil. Increases in production and consumption are reflected in the value of world exports of fisheries products. Trade grew by over 6 per cent in real terms from 2002 to 2003 to a record of US$66.8 billion, driven by an increase in the trade of fish, and crustaceans and molluscs (figure B). Fish products continue to be the dominant fisheries export product in value terms. Prices for fresh, chilled or frozen fish have remained relatively constant at approximately US$2 a kilogram, as aquaculture production keeps pace with population growth (figure C). The production of canned fish and smoked, dried and salted fish generally involves a higher degree of processing than that of fresh, chilled or frozen. The price of these products has been falling, partly reflecting continued reductions in processing costs. Demand for crustaceans and molluscs has not grown sufficiently to offset increases in supply (figure D) causing prices to fall generally.

US$/kg 1978

1983

1988

1993

1998

2003

Australian fisheries production and trade Value and volume of production fall

D

World export price, molluscs and crustaceans in various forms Canned crustaceans and molluscs

12 10 8 6

Crustaceans and molluscs

4 2005

US$/kg 1978 176

1983

1988

1993

1998

2003

The volume and value of production in Australian fisheries have been affected recently by unfavorable movements in a number of important variables. Fishing effort and catches have been influenced by fuel price increases, while an appreciating Australian dollar simultaneously makes Australian exports less competitive and overseas imports more attractive to consumers. While the volume of production increased by over 5 per cent to 288 800 tonnes (mostly from an increase in pilchard production), the value of Australian production of fisheries products fell 5 per cent to $2.1 billion in 2004-05. Approximately 94 per cent of this production related to edible seafood products, while the remaining nonedible proportion was largely pearl production, valued at $123 million. In 2004-05, finfish species accounted for 34 per cent of the gross value of production, crustaceans 38 per cent and australian commodities > vol. 13 no. 1 > march quarter 2006

fisheries molluscs 21 per cent. Rock lobster, prawns, tuna and abalone remain important contributors to gross value of production (figure E) — these are also Australia’s major export species. While the total volume of Australia’s fisheries production has increased by 30 per cent over the past five years, the real value of production has fallen by 25 per cent (figure F). This largely reflects recent declines in average real prices for seafood products, which have meant that although production has increased, the real value of Australia’s fisheries production has not kept pace. This was particularly the case in 2002-03 and 2003-04, and to a lesser extent in 200405, when the Australian dollar appreciated strongly against the currencies of major trading partners. Of the $2.1 billion of fisheries products produced in 2004-05, wildcaught fisheries accounted for $1.4 billion (70 per cent). Although wildcaught production in the later half of the 1990s remained relatively constant, fluctuating around 200 000 tonnes, over the last five years, wildcaught production increased by 30 per cent, from 222 000 tonnes to 288 000 tonnes. This change can be attributed to increased pilchard production, which has tripled in volume since 2001-02. However, being a low value species, the increase in pilchard production was not sufficient to offset declining prices for Australia’s major production species and the total value of wildcaught production therefore decreased by 26 per cent over the same period. The value of aquaculture production continued to decline in 2004-05, falling a further 15 per cent to $619 million. The fall reflects a decrease in aquaculture production of 741 tonnes and a decline in world seafood prices, particularly for southern bluefin tuna which fell by $108 million in value terms. Major aquaculture species in Australia include southern bluefin tuna, pearls, Atlantic salmon, prawns and oysters (figure G). These five products accounted for 82 per cent of the value of total aquaculture production in 2004-05.

E

Australian exports continued to fall in 2004-05

value of production of key G Gross aquaculture species

Australian exports of fisheries products fell by 7 per cent to $1.5 billion in 2004-05. Approximately 80 per cent of the total value of exports related to edible seafood products, which also declined by 2 per cent in volume terms in 200405. Pearls accounted for 95 per cent of nonedible exports. The main exported products in terms of value were rock lobster (28 per cent of gross value of exports), pearls (19 per cent), abalone (17 per cent), whole tuna (11 per cent) and prawns (11 per cent) (figure H). The decline in export values was primarily caused by a drop in the export quantity and price for whole tuna, which fell by 18 per cent and 29 per cent respectively. Together, australian commodities > vol. 13 no. 1 > march quarter 2006

Australian production of key species 2004-05

Finfish

(excl. tuna)

Rock lobster Prawns Abalone Tuna Pearls Oysters Scallops Other $m

F

100

200

300

400

500

Gross value of Australian fisheries production

2.5 aquaculture

2.0 1.5

wildcaught

1.0 0.5 2004-05

A$b

1995 -96

1996 -97

1998 -99

2002 -03

2004 -05

2004-05

Other $112m 18%

Tuna $134m 22%

Prawns $50m 8% Pearls $123m 20%

Oysters $89m 14% Salmon $112m 18%

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fisheries

H

Value of Australian fisheries exports 2004-05

Rock lobster $440m 28%

Other $222m 14% Whole tuna $162m 11% Prawns $163m 11%

Pearls $291m 19%

Abalone $263m 17%

value of Australian fisheries I Gross exports 2.0 1.5 edible

1.0 0.5

nonedible

2004-05

A$b

1995 -96

J

1996 -97

1998 -99

2002 -03

2004 -05

Export price by key species Abalone

70 60 50 40

Rock lobster

30 Southern bluefin tuna 20

Prawns

10 2004-05

Yellowfin tuna

$/kg

1996 -97 178

these two factors reduced its export value by 39 per cent, from $273 million to $166 million. There was also a 10 per cent decline in the value of nonedible exports caused by a fall in the value of both pearls and fishmeal. In 2004-05, the fall in the total value of exports continued the recent trend of declining export values for Australian fisheries products. Over the four years to 2004-05 the total value of exports fell by 36 per cent, from a peak of $2.4 billion in 2000-01 (figure I). Both edible and nonedible exports declined in value over this period, by 35 per cent and 39 per cent respectively. As a relatively small producer of fisheries products, Australia receives prices for seafood exports that are set predominantly on world markets. An appreciating Australian dollar against the currencies of major export destinations therefore results in lower export prices for Australian producers. Declining world market prices in recent years, and the recent appreciation of the Australian dollar relative to the US dollar and the Japanese yen, are largely responsible for the fall in the unit value of many of Australia’s key export products, and subsequently the decline in the total value of Australia’s seafood exports (figure J). Recent price recoveries for certain products have meant that the decline in total export value in 2004-05 was lower than that of previous years (9 per cent compared with 12 per cent in 2002-03 and 15 per cent in 2003-04). In particular, the export price for abalone made a strong recovery in 2004-05, increasing by 32 per cent from the previous year. The price of rock lobster also increased (7 per cent), while the price of prawns and yellowfin tuna remained relatively stable. Nevertheless, these changes were not sufficient to completely offset the effect of a decline in the southern bluefin tuna export price, which fell a further 26 per cent in 2004-05 to $19 a kilogram. In 2004-05 the value of exports to Japan continued to decline, partly driven by the fall in southern bluefin tuna prices, but also by substantial falls in price or quantity of other major Japanese export species (prawns, rock lobsters, abalone and tuna products). Japan remains Australia’s main export market for edible fisheries products, but is now almost equal in value to Hong Kong (figure K). The United States is Australia’s next largest export destination, while the value of exports to China grew by 33 per cent in 2004-05, mainly from increases in rock lobster and abalone exports. In 200405 these four markets accounted for 80 per cent of Australia’s exports by value.

1998 -99

2000 -01

2002 -03

2004 -05 australian commodities > vol. 13 no. 1 > march quarter 2006

fisheries Value of imports increase In 2004-05 the value of Australian imports of fisheries products increased by $39 million to $1.2 billion, driven mostly by increases in the value of prawn, mussel and scallop imports. This was despite a 1 per cent decrease in the volume of imports. Over 80 per cent of the gross value of imports was edible fisheries products, with pearls accounting for 70 per cent of nonedible imports. The main edible products imported in Australia were prawns (21 per cent of the gross value of edible seafood imports), finfish fillets (20 per cent) and canned fish (20 per cent) (figure L). Thailand, New Zealand, Viet Nam and China were the major sources of edible fisheries products imported into Australia. In 2004-05, imports from these four countries accounted for 63 per cent of total edible imports by value (figure M). Nearly 60 per cent of Australian imports of canned fish, 35 per cent of fresh, chilled or frozen prawns, and 18 per cent of canned crustaceans and molluscs were sourced from Thailand. New Zealand was the source of 37 per cent of Australian imports of fresh, chilled or frozen fish products, 31 per cent of canned crustaceans and molluscs, and 20 per cent of fresh, chilled or frozen mollusc imports. Although the real value of edible seafood imports has fluctuated around $0.95 billion over the past five years, the volume of edible seafood imports has increased by 33 per cent since 1999-2000. Of particular note is the increase in prawn imports from China and Viet Nam. The volume of prawn imports from China has increased from 250 tonnes in 1999-2000 to 4800 tonnes in 2004-05, while the volume of imports from Viet Nam increased from 1300 tonnes to 6700 tonnes over the same period. Also of note is the increase in relatively cheap imports of frozen finfish fillets from Viet Nam, which have doubled in volume since 2002-03 to 5400 tonnes.

Medium term outlook

destination markets for edible fisheries products K Major Japan

700 600 500 400

Hong Kong, China

300 200

United States

100 2004-05

China

$m

1996 -97

L

1998 -99

australian commodities > vol. 13 no. 1 > march quarter 2006

2002 -03

2004 -05

Australian imports of edible fisheries products 2004-05 Other fish $115m 12%

Other crustaceans and molluscs $211m 21%

M

Canned finfish $189m 20% Finfish fillets $190m 20%

Prawns $201m 21%

Whole finfish $54m 6%

Imports of edible fisheries products, by source 2004-05

Australian production and trade The total value of Australia’s fisheries production is expected to increase in 2005-06 to $2.15 billion, reflecting increases in the value of tuna and prawn production. Exchange rate and fuel price movements are expected to move favorably for Australian fishers over the medium term; however, there is some doubt about whether production levels can be sustained, particularly in wildcaught fisheries as the number of species classified as ‘overfished’ continues to increase. In particular, reductions in total allowable catch are being

2000 -01

Other $358m 37%

China $90m 9%

Thailand $237m 25%

New Zealand $153m 16% Viet Nam $122m 13%

179

fisheries considered by the international body that manages southern bluefin tuna. Production of some other aquaculture species is likely to increase, including farmed abalone. Total export value is forecast to increase to $1.59 billion in 2005-06, and Australian exporters will benefit from an assumed depreciation of the Australian dollar against major currencies after 2005-06. Recently, Australia has entered into free trade agreements with important seafood trading partners such as Thailand, New Zealand, Singapore and the United States. The Thailand–Australia Free Trade Agreement specifies that tariffs on fisheries products will be reduced to zero by 2010. Some are currently set at 24 per cent. Free trade agreements in general are likely to create opportunities for Australian exporters over the medium term. China continues to grow as an important export market and ABARE projects that economic growth in China will remain strong for the medium term. Income growth in China is likely to result in increased demand for high quality seafood. Economic growth in other export markets, including Japan and the United States, is not expected to be as substantial. The mismatch between Australia’s production of high value products and demand for low value products is expected to continue. Imports of vannamei prawns from Asia and frozen freshwater fillets from Viet Nam show signs of increasing — imports of frozen fillets from Viet Nam were 37 per cent higher in the first half of 2005-06 than they were in the corresponding period last year. These fillets include catfish fillets sold in Australia under various marketing names such as basa and, more controversially, Pacific roughy and Pacific dory. Recent developments on seafood labeling will help to differentiate Australian and imported seafood in the eyes of consumers, although the premium that consumers would be prepared to pay for local produce is unknown. Other marketing initiatives will remain important as fisheries products continue to compete with poultry and red meats. However, the same currency depreciation that will make Australia’s exports more competitive on global markets also increases the price of imports for Australian consumers. This should lead to better returns for Australian producers supplying the domestic market. Prawns

The majority of Australia’s prawns are harvested as wild catch from the northern waters off Queensland and the Northern Territory. A small but growing share of prawn production is farmed, the majority in Queensland. In 2004-05, 16 per cent of the total volume of prawn production in Australia was farmed. Prawn production declined by 3000 tonnes in 2004-05 to 24 000 tonnes. The decrease was largely caused by decreases in wildcaught and aquaculture production from Queensland and decreases in production from the northern prawn fishery. The value of production also fell, from $358 million in 2003-04 to $304 million in 2004-05, with falls in both production and average beach prices. The fall in prices is a reflection of the appreciating Australian dollar and increased competition on the domestic and international markets from low priced imports. In 2004-05 the volume of prawn imports from Viet Nam (predominantly P. vannamei) increased 60 per cent from 4200 tonnes in 2003-04 to 6700 tonnes. In 2004-05, China, Thailand, Viet Nam and India accounted for 85 per cent of Australia’s total prawn imports. In the medium term it is expected that Australian wildcaught production of prawns will remain relatively static. The rate of growth of the Australian farmed prawn industry will be influenced by competition from imported prawn products. Product labeling and differentiation of Australian versus imported product will also be important.

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1

Medium term projections for Australia’s fisheries products 2003 -04

Gross value of fisheries production Tuna a – real b Other fish – real b Prawns c – real b Rock lobster – real b Abalone – real b Scallops – real b Other – real b Total – real b Export value Tuna a – real b Other fish – real b Prawns Headless – real b Whole – real b Rock lobster Tails – real b Whole – real b Abalone Fresh, chilled or frozen – real b Prepared or preserved – real b Scallops – real b Other fisheries products – real b Total (excluding pearls) – real b Pearls – real b Total (including pearls) – real b

2004 -05

2005 -06 f

2006 -07 z

2007 -08 z

2008 -09 z

2009 -10 z

2010 -11 z

$m

$m

$m

$m

$m

$m

$m

$m

278 294 554 584 358 377 408 431 196 207 25 26 348 367

167 172 534 550 304 313 416 428 230 236 46 47 363 374

187 187 572 572 326 326 430 430 221 221 39 39 376 376

198 193 594 579 330 322 462 450 208 203 36 35 380 371

207 197 623 593 335 319 492 468 220 209 35 33 390 371

215 200 652 605 345 320 515 479 229 213 35 32 406 377

232 210 672 609 352 319 535 485 231 209 36 32 414 375

241 213 697 616 356 314 552 487 236 208 36 32 423 374

2 167 2 286

2 059 2 120

2 152 2 152

2 207 2 153

2 302 2 191

2 397 2 226

2 472 2 240

2 541 2 245

273 288 137 144

166 171 139 143

180 180 136 136

197 192 155 151

204 194 165 157

211 196 176 163

230 208 187 169

239 212 198 175

5 6 151 160

7 7 153 158

6 6 148 148

10 10 161 157

10 10 163 155

13 12 167 155

14 13 171 155

15 13 175 155

103 108 318 336

101 104 330 339

93 93 356 356

108 105 350 341

106 101 354 336

126 117 366 340

134 122 382 346

124 109 420 371

117 124 120 127 35 37 81 86

124 128 139 143 33 34 61 62

122 122 118 118 47 47 84 84

124 121 114 112 41 40 87 84

127 121 125 119 44 42 73 69

135 126 127 118 50 46 71 66

140 127 129 117 54 49 74 67

140 123 130 115 55 49 75 66

1 342 1 415

1 251 1 288

1 289 1 289

1 346 1 313

1 371 1 305

1 443 1 340

1 514 1 371

1 571 1 388

310 327

291 300

301 301

311 303

324 308

342 318

352 319

370 327

1 652 1 742

1 542 1 587

1 590 1 590

1 657 1 616

1 695 1 613

1 785 1 658

1 866 1 690

1 941 1 715

a Exports of tuna landed in Australia. Excludes tuna transhipped at sea or captured under joint venture or bilateral agreements. b In 2005-06 Australian dollars. c Includes headless and whole prawns only. f ABARE forecast. z ABARE projection. Sources:Australian Bureau of Statistics; ABARE.

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181

fisheries Rock lobster

The bulk of Australian rock lobster is wild caught off Western Australia, and to a lesser extent in south eastern waters around New South Wales, Victoria and Tasmania. Production in 200405 was valued at $416 million. Australian production is forecast to fall by around 5 per cent to 17 200 tonnes in 2005-06, and is not expected to surpass recent highs of 19 900 tonnes (2003-04) in the foreseeable future. The assumed depreciation of the Australian dollar against the US dollar is expected to benefit rock lobster fishers, although lower world prices caused by competition on the world market from Cuba, New Zealand, the United States and South Africa will persist. Abalone

Australian production of abalone is forecast to remain relatively stable from 2004-05 to 2005-06 at around 5800 tonnes, worth $221 million. Abalone is currently harvested mainly from managed quota fisheries. Aquaculture production of abalone is expected to increase significantly over the next few years as production from farms in Victoria, South Australia, Tasmania and Western Australia come on stream. There are also preliminary plans for a new abalone farm in South Australia that will increase farmed production of abalone. However, it is expected that wild fisheries will continue to provide the bulk of production in the medium term. Like tuna, prawns and rock lobster, the abalone industry is highly export oriented, and like these other industries, the appreciating Australian dollar and lower demand from many Asian economies have had a negative impact on prices and export volumes. Exchange rate movements and the expected increase in production from aquaculture operations are expected to increase the value of abalone exports through to 2010-11. Tuna

Approximately three-quarters of Australia’s production of tuna is exported, mostly to Japan and the United States. The principal tuna species in value and volume terms is southern bluefin tuna, which is purse seined from Commonwealth waters and then fattened in pontoons. Other important export species are yellowfin tuna and bigeye tuna. Falling world prices for bluefin — caused partly by an increase in supply from northern bluefin tuna farms in the Mediterranean as well as unfavorable exchange rate movements — have driven a fall in the value of exports of almost 40 per cent to $171 million in real terms. However, a recovery to approximately $180 million is expected in 2005-06 as production increases and the Australian dollar begins to depreciate against both the Japanese yen and the US dollar. Fishers in the eastern tuna and billfish fishery are also likely to benefit in the medium term from a decrease in world oil prices because yellowfin tuna and bigeye tuna are often caught at great distances from shore. New management arrangements for this fishery may also lead to efficiency gains and reductions in costs. The global stock of southern bluefin tuna is managed by the Commission for the Conservation of Southern Bluefin Tuna, which is responsible for setting a total allowable catch for the fishery, of which Australia has a 35 per cent share. Concern about the size of the stock has prompted discussion about reducing catch limits by over a third (CCSBT 2005). However, ABARE has assumed that quotas will remain at current levels because the timing and size of the reductions are not known with certainty.

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fisheries

Current economic status of Commonwealth fisheries The Australian Fisheries Management Authority (AFMA) manages more than twenty fisheries on behalf of the Commonwealth. Together, these fisheries produced 71 800 tonnes of fisheries products valued at $323.0 million in 2004-05. ABARE’s regular economic surveys suggest that many of the fisheries do not earn significant, positive returns. Historically, returns in the eastern tuna and billfish fishery, and the Commonwealth trawl sector of the southern and eastern scalefish and shark (SESS) fishery have been low, especially relative to returns in the northern prawn fishery (figure N). In recent years, these poor returns have been caused partly by unfavorable movements in world fish prices, exchange rates and fuel prices, all of which are beyond the control of fishers and the management authority. However, one important variable that can be managed to some extent is the abundance of the fish stock, which is influenced not only by environmental factors but also by the level of fishing effort. A ‘thick’ stock makes fish easier to find and cheaper to catch, leading to higher returns and a more Recent net returns in surveyed Commonwealth fisheries resilient industry. An abundant stock is only possible if fishers’ effort is restricted. Northern To help Commonwealth fisheries become more profitprawn able and to protect fish stocks, the Australian Government Eastern tuna and billfish has announced a structural adjustment package targeting the SESS fishery, the eastern tuna and billfish fishery and Commonwealth trawl sector the Bass Strait central zone scallop fishery (see box 2). The package will also be available to northern prawn fishers if 2002-03 Gillnet, hook and trap sector output controls are adopted in that fishery. The announce2001-02 ment of the package coincides with changes to the way in 2000-01 Torres Strait prawn which some of the Commonwealth’s most valuable fisheries are managed, including the eastern tuna and billfish fishery and the SESS fishery. Current issues in these fisheries — and –20 –10 2004-05 10 20 30 40 50 $m the northern prawn fishery — are discussed below.

N

60

Economic returns ABARE regularly conducts economic surveys of the larger Commonwealth fisheries. From the cost and revenue data collected, ABARE estimates a fishery’s net returns, which is equivalent to total revenue less all cash and economic costs. The measurement incorporates some items that would normally not be included in fishers’ accounts, such as the opportunity cost of family labor and a ‘normal’ rate of return to capital. See Galeano et al. (2005) for more information about how net returns are calculated.

Offroad diesel price Depending on the fishery, fuel costs typically make up 10–20 per cent of total cash costs for a fishing business. The real price of offroad diesel increased by a further 25 per cent in 200405 to an average of 71 cents a litre. This follows a substantial increase in 2003-04 of 10 cents (or 22 per cent). Diesel prices are now the highest they have been in real terms since 198485. Prices are expected to increase slightly in 2006, and then fall over the medium term. australian commodities > vol. 13 no. 1 > march quarter 2006

Australian offroad diesel price

80 60 40 20 2004-05

c/L 1970 -71

1980 -81

1990 -91

2000 -01

2010 -11

183

fisheries Southern and eastern scalefish and shark fishery Box 2: Securing Our Fishing Future adjustment package In November 2005 the Australian Government announced a $220 million structural adjustment package for the fishing industry that, combined with a range of fisheries management measures, is aimed at addressing overfishing and rebuilding overfished stocks. The package includes a $149 million fishing concession buyback involving a oneoff, voluntary tender process to allow individual fishing businesses to exit the industry. Commonwealth and state fishers affected by the declaration of marine protected areas in the South East Marine Region will also be eligible for business exit assistance. Additional elements of the package include $30 million for business restructuring assistance for onshore and fishing related businesses affected by the reduction in fishing activity, and up to $20 million for fishing community grants to help generate economic activity in ports affected by the adjustment. A further $21 million is being provided to offset management costs, improve management measures and fund research. More information is available at www.daff.gov.au.

as a share of total allowable O Catch catch for the SESS fishery’s top ten species 2005

Blue grenadier Flathead Spotted warehou Gummy shark Pink ling Orange roughy

(Cascade Plateau)

Jackass morwong Orange roughy (Eastern) Mirror dory Redfish %

20 40 60 80 Percentage of TAC filled

100

The SESS fishery was formed in 2003 by merging four fisheries: the south east trawl fishery, the Great Australian Bight trawl fishery, the east coast deepwater trawl fishery and the gillnet, hook and trap fishery. Management controls vary between sectors, but the predominant arrangement is a system of individual transferable quotas that gives fishers a right to a portion of a total allowable catch (TAC) set for 24 species. Other restrictions include limited entry, gear restrictions and area closures. Although TACs are theoretically capable of strictly limiting the catch of many of the fishery’s key species, the most recent report on stock status classifies seven stocks as overfished, and at least six as subject to overfishing (Caton and McLoughlin 2004). Although not all quotas will be met every season in a multispecies fishery, it would appear that TACs have generally been set too high in the SESS (Elliston et al. 2004). For example, TACs for some species that have been classified as overfished have not been filled. Of the SESS fishery’s top ten quota species in terms of volume, pink ling was the only species for which quota was filled in 2005 (figure O). Apart from possibly jeopardising fish stocks, unfilled TACs suggest that fishers’ effort is not being restricted. They are an indication that returns in the fishery are not high enough to encourage fishers to increase their fishing effort. The results of economic surveys of the Commonwealth trawl sector of the SESS (formerly the south east trawl fishery) presented in figure N confirm the low returns that are expected given the large amount of unfilled quota. When TACs are not binding, one of the key benefits of a tradable output control is lost — the incentive created by a system of binding TACs for quota to move to the least cost producers. The slow rate of autonomous adjustment in the fishery partly reflects quotas being set well above historical levels of catch. AFMA has reduced TACs for at least thirteen species in the SESS for the 2006 and 2007 fishing seasons. Using 2004 catch levels as a guide, this is likely to restrict fishers’ catch and thereby give better protection to fish stocks, generate greater net returns, and improve the efficiency of the fishery overall by making the quota market more effective at transferring effort to least cost producers. Adjustment in the fishery will also be enhanced by the Securing Our Fishing Future structural adjustment package (see box 2).

Northern prawn fishery The northern prawn fishery is the Commonwealth’s most valuable fishery and one of the few that regularly earns substantial and positive net returns. Effort is controlled principally by limited entry and input controls that specify a maximum length for headrope that controls the size of the 184

australian commodities > vol. 13 no. 1 > march quarter 2006

fisheries net fishers can tow. At present, the stock status for endeavour Input substitution in the northern prawn and king prawns is not known, while banana prawns and fishery grooved tiger prawns are classified as not overfished (Caton cut in vessel Gear length A units Compulsory size and power and McLoughlin 2004). The status of brown tiger prawns is 26 430 currently under review. However, there is evidence that the fishery could perform 25 425 better. Input controls are not the government’s preferred 24 420 management arrangement, except for fisheries where output controls can be shown to be infeasible. Input controls do not 23 415 leave fishers free to choose the combination of inputs that minimise costs for their particular operation. Further, fishers 22 410 Headrope length are quick to circumvent restrictions on one input by increasing becomes controlled their use of another. This means that the management authority A units input metres must reconfigure input controls regularly to keep effort under 1988 1991 1994 1997 2000 control, possibly leading to gear being made redundant. In the northern prawn fishery, the introduction of restrictions on vessel size and power resulted in fishers trawling with larger nets (figure P). Kompas and Che (2002, 2004) estimated that this was associated with a decline in the average efficiency of the fleet of approximately 4.5 per cent. When headrope length became the controlled input in 1999, vessel power and size increased again. Apart from fishers being forced to use an inefficient combination of inputs, there is also evidence that the total catch of tiger prawns in the fishery might be too high to maximise returns. Rose and Kompas (2004) suggested that a total harvest of 1560 tonnes was appropriate, which is significantly lower than the actual catch of tiger prawns of 1785 tonnes in 2004-05. This situation should change following the fishery’s adoption of maximum economic yield as the basis for effort level restrictions in the fishery. A component of the recently announced structural adjustment package (see box 2) is tied to northern prawn fishers accepting output controls as the principal management arrangement. Apart from being the Australian Government’s preferred option generally, output controls would prevent the problem of input substitution and give managers greater control over total catch. They can also reduce the incentive for fishers to acquire bigger, more powerful vessels for the purpose of catching the largest proportion of the catch quickly. The northern prawn fishery is well suited to output controls, having only a few target species and good data on its economic and biological aspects. Further, Rose and Kompas (2004) report that uncertainty about stock levels is usually less than uncertainty about catch per unit of effort in the fishery, suggesting that output controls are more appropriate than input controls as a management tool.

P

Eastern tuna and billfish fishery The eastern tuna and billfish fishery lies off the east coast of Australia and is the principal Commonwealth longline and minorline fishery. Management of the fishery is in transition to a new management plan that will introduce transferable effort units. In the meantime the fishery will continue to be managed using a permit system. The fishery currently has no target stocks classified as overfished, although overfishing is occurring for bigeye. The status of both yellowfin tuna and broad billed swordfish are uncertain (Caton and McLoughlin 2004). Campbell (2005) reports that the area of the fishery subject to fishing has been expanding recently, suggesting traditional areas are no longer productive enough. The revamp of the fishery’s management arrangements was motivated partly by the persistently low or negative economic returns shown in figure N. These low returns are reflected in australian commodities > vol. 13 no. 1 > march quarter 2006

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fisheries the high proportion of latent permits in the fishery. In the eastern tuna and billfish fishery it is common for many permits to be unused (table 1) (Galeano et al. 2005). A high proportion of latent permits implies that management controls have not restricted effort effectively and that any profits that might be generated in future will be dissipated quickly by an expansion of effort (and costs). Under the new management plan, fishers will be allocated statutory fishing rights entitling them to a particular number of effort units. The fishery will remain partitioned into subareas, with each subarea having a subarea factor that reflects differences in the level of productivity. The number of effort units expended in a fishing set is found by multiplying the number of hooks used by the subarea factor. The susceptibility of the Australian fishing industry to changes in variables beyond the control of managers and fishers has highlighted the important impact management arrangements can have Issued and active permits in the on profitability. Fishers have had to catch fish from a thinning stock eastern tuna and billfish fishery when fuel prices are high, and then sell them when exchange rates and seafood prices are unfavorable. While stock size is influYear Permits Active permits a enced by environmental factors, it can also be strongly influenced 1998 222 151 by fishing mortality. Maintaining thicker stocks so that total costs 1999 220 152 are significantly below total revenue creates a buffer that allows 2000 220 142 the industry to better withstand fluctuations in economic condi2001 220 140 2002 220 143 tions. Recently implemented changes to management arrange2003 220 135 ments, combined with a substantial structural adjustment package, a Defined as permits for which a logbook was returned. are likely to result in healthier stocks and a more robust fishing industry.

1

References Campbell, R. 2005, ‘Annual indicator of swordfish availability on the Mooloolaba Grounds’, in Campbell, R. (ed), Integrated Analysis and Assessment of the Eastern Tuna and Billfish Fishery: Compilation of Related Project Papers, CSIRO Marine Research, June, pp.336– 58. Caton, A. and McLoughlin, K. (eds) 2004, Fishery Status Reports 2004: Status of Fish Stocks Managed by the Australian Government, Bureau of Rural Sciences, Canberra. CCSBT (Commission for the Conservation of Southern Bluefin Tuna) 2005, Report of the Twelfth Annual Meeting of the Commission, Japan, October. Elliston, L., Newton, P., Galeano, D., Gooday, P., Kompas, T. and Newby, J. 2004, Economic Efficiency in the South East Trawl Fishery, ABARE eReport 04.21 Prepared for the Fisheries Resources Research Fund, Canberra, November. FAO (Food and Agriculture Organisation of the United Nations) 2004, The State of World Fisheries and Aquaculture: 2004, Rome. –––– 2005a, Regional Workshop on Rehabilitation of Fisheries and Aquaculture in Coastal Communities of Tsunami Affected Countries in Asia, 28 February – 1 March 2005, FAO Regional Office for Asia and the Pacific, Thailand. –––– 2005b, Yearbook of Fishery Statistics: Aquaculture Production: 2003, vol. 96/2, Rome. –––– 2005c, Yearbook of Fishery Statistics: Capture Production: 2003, vol. 96/1, Rome. –––– 2005d, Yearbook of Fishery Statistics: Commodities Production: 2003, vol. 97, Rome.

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fisheries Galeano, D., Langenkamp, D., Shafron, W. and Levantis, C. 2004, Australian Fisheries Surveys Report 2003: Economic Performance of Selected Fisheries in 2000-01 and 2001-02, ABARE, Canberra, February. ––––, Shafron, W. and Newton, P. 2005, Australian Fisheries Surveys Report 2004, ABARE Report to the Fisheries Resources Research Fund, Canberra, August. Kompas, T. and Che, N. 2002, A Stochastic Production Frontier Analysis of the Australian Northern Prawn Fishery, ABARE Report to the Fisheries Resources and Research Fund, Canberra. Kompas, T. and Che, N. 2004, A Bioeconomic Model of the Australian Northern Tiger Prawn Fishery: Management Options Under Uncertainty, ABARE Report to the Fisheries Resources Research Fund, Canberra, August. Rose, R. and Kompas, T. 2004, Management Options for the Australian Northern Prawn Fishery: An Economic Assessment, ABARE eReport 04.12 Prepared for the Fisheries Resources Research Fund, Canberra, August.

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farm performance

> Rhonda Treadwell > +61 2 6272 2043 > [email protected]

farm financial performance investing in the future Peter Martin, Stephen Hooper, Myrsije Bilali, Phantipa Puangsumalee, Paul Phillips and Rhonda Treadwell

> Increased winter rainfall across much of Australia’s grain producing regions in 2005 increased overall crop production. This lifted incomes for most southern state grain farms in 2005-06 despite increases in farm costs. > In 2005-06, incomes for broadacre sheep producers are expected to increase only slightly. This reflects lower wool prices and increased farm costs almost offsetting continued strong sheep and lamb prices and increased sheep, lamb and wool production. > Reduced beef cattle turnoff, particularly in Queensland, is expected to result in lower incomes for beef farms, but beef cattle numbers are projected to rise. > Improved seasonal conditions and higher milk prices are forecast to encourage increased milk production and result in a rise in incomes for dairy farms in 2005-06. > Demand for broadacre agricultural land grew more slowly in 2004-05 than in recent years. However, overall land values increased, strengthening farm equity. > Farm debt increased significantly in 2004-05, mainly to finance farm expansion and new investment. Net farm investment has remaining high in each of the past three years, despite the impact of drought.

Farm incomes increase In this paper, the current financial performance of Australia’s broadacre and dairy farms is presented. ABARE’s farm survey data are used to gain insights into the performance of Australian farms in the period since 2003-04 and to analyse projected farm financial performance in 2005-06. The data are also used to discuss recent developments in farm investment and exceptional circumstances assistance provided to these industries. The financial performance of Australian farms has improved in the past three years as the drought that was most severe and widespread in 2002-03 has receded. Through this period, prices for livestock remained high in historical terms, assisting farms to manage cash flow during a time of reduced production. High beef cattle prices over the past four years have been particularly important in improving farm incomes as more Australian farms are engaged in beef cattle production than in any other enterprise. Strong demand for rural land resulted in rising capital values that strengthened farm equity positions. The benefits of rising land values was partially offset by the impact of higher working capital debt, as producers borrowed to minimise the impact of reduced cash flow during the drought. At the end of the 2004-05 financial year the average equity ratio estimated for Australian broadacre farms was as high as it has been in any year since the 1980s.

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farm performance

Financial performance of Australian farms Each year ABARE surveys a large number of producers in the broadacre and dairy sectors of Australian agriculture through the Australian agricultural and grazing industries survey (AAGIS) and the Australian dairy industry survey (ADIS). These surveys provide detailed financial and physical information on farm businesses and the socioeconomic circumstances of their operators. Information provided by farmers in the surveys in November and December 2005 in combination with preliminary data collected earlier in the year have been used to project farm financial performance estimates for the 2005-06 financial year. The information collected provides a basis for analysing the current financial position of broadacre and dairy industries and expected changes in the short term. Projections of farm performance reflect producers’ plans and expectations as at November 2005. In some areas of Australia, seasonal conditions may have improved by more than anticipated in November, while in others, seasonal conditions may have deteriorated. In addition, producers’ expectations of commodity prices may vary significantly from those finally received. Estimates for 2005-06 will be progressively updated in future data releases as additional information is incorporated.

Farm receipts After a late start to the winter grain crop growing season in the eastern states, above average winter rainfall in most grain producing regions of Australia resulted in winter crop production in 2005-06 being the second highest on record. Improved seasonal conditions through summer relative to 2004-05, and the availability of more irrigation water in northern New South Wales, is estimated to have resulted in an

Major financial performance indicators Farm cash income = total cash receipts – total cash costs Total revenues received by the farm business during the financial year

Payments made by the farm business for materials and services and for permanent and casual hired labor (excluding owner manager, partner and family labor)

Farm business profit = farm cash income + changes in – depreciation – imputed trading stock labor costs Profit at full equity = farm business profit + rent + interest and + depreciation (Return produced by all finance lease on leased terms the resources used in payments the farm business)

Rate of return = profit at full equity

total opening capital x 100

(Return to all capital used)

Off-farm income = wages off-farm + other business income + investment + social welfare payments

(Owner manager and spouse only)

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farm performance increase in the area planted to sorghum, cotton and other summer crops. Yield prospects for the summer crops appear to be good. In addition to increased production, wheat producers are expected to benefit from slightly higher wheat prices in 2005-06. However, prices for all of the other major grains, oilseeds and pulses are forecast to fall in 2005-06. Overall, receipts from crops are projected to increase by around 10 per cent for broadacre farms in 2005-06. At the national level, wool production is projected to increase slightly in 2005-06, but weaker demand is expected to result in lower wool prices and a reduction in farm receipts for wool. The number of lambs marked and calves branded is projected to increase in 2005-06. After a prolonged period of high beef cattle turnoff, turnoff is projected to fall in 2005-06 as numbers are rebuilt in most states, despite the strong incentives of high sale prices. The reduction is expected to be most pronounced in the northern cattle producing areas where the high volume of beef cattle turnoff in recent years has significantly reduced the availability of suitable slaughter stock for 2005-06. At the national level, average farm cash receipts are expected to rise by around 3 per cent, as increased production boosts cropping receipts. However, livestock receipts are forecast to fall as turnoff eases. Milk receipts are also projected to increase in 2005-06, reflecting a combination of slightly higher milk production and stronger milk prices. A number of factors are expected to

1

Financial performance Average per farm All broadacre industries 2003-04

2004-05 p

2005-06 s

Total cash receipts Total cash costs

$ $

294 989 229 968

289 750 234 730

(4)

Farm cash income Farms with negative farm cash income

$ %

65 021 28

55 020 34

(9)

Farm business profit Farms with negative farm business profit Profit at full equity – excl. capital appreciation – incl. capital appreciation

$ %

(4)

300 700 240 300

(5)

60 400 34

4 537 62

–9 450 (48) 67 (2)

1 800 60

$ $

30 443 243 411

14 720 (32) 182 060 (7)

30 300 na

Farm capital at 30 June a Net capital additions Farm debt at 30 June b

$ $ $

2 521 061 41 822 238 121

2 736 320 (3) 29 340 (50) 272 150 (5)

na na 239 800

Equity at 30 June bc Equity ratio bd

$ %

2 149 085 90

2 352 200 90

Harvest loans at 30 June e Farm liquid assets at 30 June b Farm management deposits (FMDs) at 30 June b Share of farms with FMDs at 30 June b

$ $ $ $

Rate of return f – excl. capital appreciation – incl. capital appreciation Off-farm income of owner manager and spouse b

(1)

na na

8 559 136 393 24 779 22

8 590 (14) 110 710 (7) 22 140 (8) 20 (7)

na na na na

% %

1.3 10.8

0.6 (31) 7.2 (7)

1.2 na

$

27 003

30 560

(3)

(6)

na

a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. f Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not available.

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australian commodities > vol. 13 no. 1 > march quarter 2006

farm performance contribute to the higher milk production, including improved seasonal conditions, reduced grain and fodder prices and increased water availability in the major dairy areas.

Farm costs Broadacre and dairy farm expenditure was relatively high in 2004-05, largely driven by increased expenditure on livestock purchases and continued expenditure on livestock feeding in many regions. Overall, broadacre farm costs are forecast to rise by around 2 per cent in 2005-06, mainly because of increased expenditure on fuel, fertiliser and freight costs. Increased plantings and size of grain crops is also expected to result in higher crop harvesting and marketing costs. Dairy farm costs are also estimated to rise, by 3 per cent. As feed costs are lower than in 2004-05, producers are expected to make greater use of purchased feed to lift milk production. This is a major contributor to the increase in dairy farm costs.

Farm cash income and farm business profit In 2004-05, farm cash income for the broadacre industries as a group fell by about 15 per cent to around $55 000 (table 1, figure A). In 2004-05, increased livestock sales receipts were more than offset by the impact of weaker crop and wool receipts and higher farm costs. Farm cash income for broadacre farms is expected to rise by around 10 per cent in 2005-06 to just below the long term average, in real terms, as increases in farm cash receipts slightly exceed increases in farm cash costs. Farm cash income is a measure of the cash funds available for farm investment and consumption after paying all costs incurred in production, including interest payments, but excluding capital payments and payments to family workers. It is a short term measure of farm performance because it takes no account of depreciation or changes in farm inventories.

2

A

All broadacre industries Farm cash income

90 60 30 2005-06

$’000 –30 Farm business profit

–60 1980 -81

1985 -86

1990 -91

1995 -96

2000 -01

2005 -06

Financial performance , by state Average per farm Broadacre industries Farm cash income

Farm business profit a

Rate of return b

2003-04 2004-05 p 2005-06 s 2003-04 2004-05 p 2005-06 s 2003-04 2004-05 p 2005-06 s $ New South Wales Victoria Queensland Western Australia South Australia Tasmania Northern Territory Australia

$

$

$

$

$

%

%

%

31 140 49 860 50 197 36 190 47 214 53 210 159 704 87 870 117 607 67 200 44 674 70 300 607 295 301 460

52 700 55 300 32 300 96 100 96 100 42 000 332 000

–25 843 4 685 –19 011 88 682 44 171 –1 061 144 787

–7 800 –19 810 –10 050 4 960 –20 150 35 010 149 370

3 200 –6 900 –15 800 6 600 34 800 –8 600 170 000

0.2 1.2 0.3 4.3 2.8 0.8 2.3

0.6 –0.2 0.6 1.5 0.0 2.1 1.8

1.4 0.6 0.7 1.4 2.2 0.3 2.4

60 400

4 537

–9 450

1 800

1.3

0.6

1.2

65 021

55 020

a Defined as farm cash income plus buildup in trading stocks, less depreciation and the imputed value of operator partner and family labor. b Defined as profit at full equity, excluding capital appreciation, as a percentage of total opening capital. Profit at full equity is defined as farm business profit plus rent, interest and lease payments less depreciation on leased items. p Preliminary. s Provisional estimate.

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191

farm performance A longer term measure of profitability is farm business profit, which takes account of capital depreciation and changes in on-farm inventories of things such as livestock, fodder, grain and wool. Farm business profit for the broadacre industries is estimated to increase in 2005-06 and by substantially more than the increase in farm cash income (table 1). While significant increases are projected in the value of inventories of livestock, particularly beef cattle on farm, wool and grain stocks held on farms are also expected to rise. Increases in inventories enhance a producer’s ability to generate cash flow beyond 2005-06.

Rates of return Rates of return to total farm capital are projected to rise for crop industry farms in 2005-06 after having been relatively low in 2004-05. Rates of return for the broadacre livestock industries are expected to remain relatively unchanged. Strong demand for rural land in the past three years has resulted in increased land values in most regions. Consequently, the total capital value of farms in Australia is expected to increase further in 2005-06. Rates of return presented in the tables are calculated by dividing farm business profit adjusted to a full equity basis by opening total farm capital. That is, farm business profits have been adjusted by adding on interest and leasing costs. This removes the effects of the financing arrangements on profit. Two rates or return are estimated: the rate of return excluding capital appreciation (operational rate of return) and the rate of return including capital appreciation (full economic rate of return). In recent years, operational rates of return for broadacre farms have fallen as the average growth in farm profitability has not kept pace with growth in the capital value of the farm. However, the full economic rate of return realised by the average broadacre farm business has been at historically high levels (table 1).

Performance, by state Broadacre farm cash income in 2005-06 is projected to rise in New South Wales, Victoria, Western Australia and South Australia, states where there is a substantial proportion of cropping farms. Farm cash income is also expected to increase in the Northern Territory but to fall in Queensland and Tasmania. Farm business profit is projected to improve significantly in all states except Queensland and Tasmania in 2005-06 (table 2), as a consequence of higher farm cash income and an increase in the value of trading stocks as beef cattle and sheep numbers are rebuilt. The proportion of farms recording 192

australian commodities > vol. 13 no. 1 > march quarter 2006

farm performance business losses is projected to decline in all states except Tasmania and the Northern Territory. It is also expected that there will be a small reduction in average debt. In New South Wales, increased winter crop production in all cropping regions is projected to lead to a modest increase in average farm cash income. This is despite increased crop related costs, reductions in beef cattle and sheep turnoff and lower wool prices. Farm cash incomes in Victoria, South Australia and Western Australia are also projected to rise on the back of increased winter crop production. The strongest increase is forecast for Victoria and South Australia, where the increase in winter crop production has been largest. Poor winter crop production in South Australia and Victoria in 2004-05 will result in relatively small payments from 2004-05 coming through to the 2005-06 year. In contrast, payments for Western Australian farmers will be much more substantial following the relatively

3

Financial performance of broadacre farms, by industry Average per farm Farm cash income 2003-04

Wheat and other crops

Farm business profit p

2004-05 p 2005-06 s 2003-04

$

$

$

$

2004-05 p 2005-06 s $

$

130 370

84 310

120 200

51 990

–2 440

33 200

Mixed livestock crops

82 640

60 750

84 300

19 700

–13 000

14 600

Beef industry – farms with less than 300 beef cattle – farms with more than 300 beef cattle

33 330 800 71 140

49 100 – 320 101 100

29 700 –7 800 63 200

–18 880 –33 000 –3 700

–6 270 –35 890 24 900

–14 000 –40 200 9 200

Sheep – farms with less than 3000 sheep – farms with more than 3000 sheep

30 500 13 810 63 780

25 950 13 570 63 450

27 500 19 500 67 800

–23 410 –36 360 2 430

–21 310 –29 240 2 690

–19 500 –24 700 –2 500

Sheep beef

46 260

54 610

33 400

–8 270

–2 290

–7 500

All broadacre industries

65 020

55 020

60 400

4 540

–9 450

1 800

Dairy

99 770

83 270

99 800

–14 160

19 890

23 800

Rate of return – excluding capital appreciation a 2003-04

Rate of return – including capital appreciation a

2004-05 p 2005-06 s

2003-04

2004-05 p

%

%

%

%

%

Wheat and other crops

3.7

1.3

2.7

12.9

7.3

Mixed livestock crops

2.3

0.6

1.9

12.7

6.6

Beef industry – farms with less than 300 beef cattle – farms with more than 300 beef cattle

–0.1 –3.3 0.6

0.5 –2.9 1.3

0.3 –3.0 1.1

8.2 8.2 8.2

9.3 6.6 10.0

Sheep – farms with less than 3000 sheep – farms with more than 3000 sheep

–0.4 –2.5 1.0

–0.4 –1.7 1.0

–0.1 –1.1 1.1

8.6 10.4 7.4

5.5 4.3 6.9

Sheep beef

0.7

0.6

0.6

12.2

4.7

All broadacre industries

1.3

0.6

1.2

10.8

7.2

Dairy

0.9

2.3

2.5

9.9

8.4

a Defined as profit at full equity, excluding capital appreciation, as a percentage of total opening capital. Profit at full equity is defined as farm business profit plus rent, interest and lease payments less depreciation on leased items. p Preliminary. s Provisional estimate.

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farm performance

B

Farm cash income Wheat and other crops

150

100

50

Mixed livestock–crops 2005-06

$’000 1980 -81

1985 -86

1990 1995 -96 -91

2000 2005 -01 -06

Sheep

Wheat and other crops industry

Sheep–beef 60

40

20 2005-06

$’000 1985 -86

1990 1995 -91 -96

2000 -01

2005 -06

Beef industry 80

60

40

Farm cash income for the wheat and other crops industry fell sharply in 2004-05 as both grain production and prices fell from the relatively high levels of 2003-04. In 2005-06, farm cash income is projected to increase strongly on the basis of an increase of almost 30 per cent in winter grain production and a small increase in wheat prices. This is despite lower prices for many other grains and an increase in farm cash costs. In addition, a larger than usual proportion of feed grain production has been retained on farms because of the low feed grain prices on offer. Overall, cash costs for wheat and other crops industry farms are projected to increase by 5 per cent with increased expenditure on fuel, fertiliser and freight. Increased grain production is also expected to result in higher outlays on harvesting and grain marketing. Business profit for wheat and other crops industry farms in 2005-06 is projected to increase significantly to be similar to those of the late 1990s but below the levels in 2001-02 and 2003-04.

Mixed livestock–crops industry

20 2005-06

$’000 1980 -81 194

Performance, by industry Summary information on financial performance in Australian broadacre and dairy industries is given in table 3 and figure B, while detailed estimates are provided in table 4.

80

1980 -81

large 2004-05 crop. As a consequence, average farm cash incomes for cropping farms in Victoria and South Australia in 2005-06 are projected to be lower than would be expected based on the increase in crop production. Farm cash income for Queensland broadacre farms in 2005-06 is forecast to fall following a reduction in turnoff of beef cattle. Also, the impact of a projected increase in summer grain production is expected to be partially offset by continued low winter grain production and weaker grain prices. While overall cattle numbers are also expected to increase from increased calvings, turnoff of slaughter cattle is expected to fall after several years of relatively high turnoff. The increase in beef cattle numbers will largely mitigate the effect of lower farm cash income on farm business profit as trading stocks are rebuilt.

1985 -86

1990 1995 -91 -96

2000 -01

2005 -06

In 2004-05, livestock receipts, particularly beef cattle receipts, increased as a result of higher turnoff and strong prices. However, the increase was insufficient to offset the impact of lower winter crop production and reduced grain

australian commodities > vol. 13 no. 1 > march quarter 2006

farm performance and wool prices on farm receipts. Consequently, average farm cash income for mixed–livestock crops farms fell in 2004-05. Lower wool prices in 2005-06 are expected to significantly reduce wool receipts despite a small increase in wool production. However, increased receipts from both winter and summer crops are projected to raise total crop receipts in 2005-06. This is despite lower feed grain prices and the retention of an increased proportion of feed grains production on farm in eastern states. The impact of higher lamb turnoff on receipts in 2005-06 is expected to be mostly countered by a reduction in lamb prices. Meanwhile, sheep turnoff is expected to fall and beef cattle turnoff is expected to increase only slightly. Overall, total cash receipts for mixed livestock–crops farms is expected to increase by around 12 per cent in 2005-06 and to be partly offset by a projected increase of around 5 per cent in total cash costs. Expenditure on items such as fuel, fertiliser, freight, handling and marketing is projected to contribute to the increase in costs. However, expenditure on Broadacre industries fodder and livestock purchases is projected to fall. Overall, The broadacre sector of Australian agriculture is farm cash income is projected to increase by 39 per cent to defined to include five industry types: just below the longer term average. Farm business profit is Wheat and other crops industry estimated to increase by slightly more on the back of higher The wheat and other crops industry represents the on-farm inventories of grain, wool and livestock.

Sheep industry Farm cash income for sheep industry farms fell in 200405 because of reduced receipts from wool (figure B), and despite increases in receipts from sheep and lambs and a reduction in farm costs, particularly expenditure on fodder. Relatively low sheep numbers combined with strong export demand resulted in rising real lamb and mutton prices over this period. Sheep industry producers have responded to this by increasing the production of lambs and sheep for slaughter. Consequently, producers in this industry have become increasingly more reliant on income from lamb and sheep sales. Receipts from sheep and lambs have risen from 14 per cent of average farm receipts in 1990-91 to over 40 per cent in 2004-05. For more information on the performance of lamb producing farms see box ‘Slaughter lamb industry’. In 2005-06, receipts from wool are projected to fall further, although the reduction for sheep industry farms is expected to be less than in the other industries with sheep. Wool cut per head is projected to rise as is the number of sheep shorn, cushioning some of the reduction in wool prices. Sheep industry incomes will also continue to be underpinned by receipts from sheep and lambs. However, only a small increase is expected in sheep and lamb receipts as turnoff is constrained by flock rebuilding in 2005-06. Receipts from crops and beef cattle are expected to also increase on farms with these options. At the national level a small increase is projected in sheep industry cash receipts, offset to some extent by an australian commodities > vol. 13 no. 1 > march quarter 2006

more specialist producers of cereal grains, coarse grains, pulses and oilseeds.

Mixed livestock–crops industry The mixed livestock–crops industry covers farms engaged in the production of sheep and/or beef cattle in conjunction with substantial activity in broadacre crops such as wheat, coarse grains, oilseeds and pulses.

Sheep industry The sheep industry represents the more specialised producers of sheep and wool. However, the number of properties classified to the industry, along with the industry’s contribution to wool production, has declined substantially since the early 1990s as producers have diversified enterprises. Currently, sheep industry farms account for only around a third of Australia’s wool production. The majority of both wool and sheep meat production occurs on mixed enterprise farms, particularly on mixed livestock–crops industry farms.

Beef industry The beef industry covers properties engaged mainly in running beef cattle and accounts for around 60 per cent of Australia’s beef production. The beef industry contains a large number of small farms.

Sheep–beef industry The sheep–beef industry covers properties engaged in running sheep and beef cattle. As for the sheep and beef industry, this industry also contains a large number of small farms.

195

farm performance

4

Financial performance, by industry Average per farm Broadacre and dairy industries Wheat and other crops industry 2003-04

2004-05 p

Mixed livestock–crops industry

2005-06 s 2003-04

2004-05 p

2005-06 s

Total cash receipts Total cash costs

$ $

449 530 319 161

421 090 336 780

(7)

475 500 355 300

340 850 258 207

307 320 246 570

(5)

(5)

(6)

343 600 259 300

Farm cash income Farms with negative farm cash income

$

130 368

84 310

(19)

120 200

82 643

60 750

(13)

84 300

31

(12)

26

27

31

(16)

30

–2 440 (640)

33 200

19 699

–13 000

(52)

14 600

Farm business profit Farms with negative farm business profit Profit at full equity – excl. capital appreciation – incl. capital appreciation

%

14

$

51 988

%

42

61

(7)

49

52

67

(7)

54

$ $

93 997 324 332

37 230 200 690

(44)

74 900 na

51 573 285 343

14 690 164 710

(17) (10)

48 300 na

na 2 540 889 na 33 629 309 000 292 715

2 696 620 39 330 309 910

na 2 137 367 na 88

2 332 240 88

(5)

Farm capital at 30 June a Net capital additions Farm debt at 30 June b

$ 2 850 691 2 977 450 $ 82 447 51 240 $ 346 770 449 590

Equity at 30 June bc Equity ratio bd

$ 2 392 308 2 427 840 % 87 84

Harvest loans at 30 June e Farm liquid assets at 30 June b Farm management deposits (FMDs) at 30 June b Share of farms with FMDs at 30 June b

$ $

28 971 165 590

$

47 675

%

Rate of return g - excl. capital appreciation - incl. capital appreciation Off-farm income of owner manager and spouse b

35 610 159 780

(18) (5) (37) (8) (6) (1)

(5) (76) (9)

(1)

na na 296 100 na na

na na

7 978 152 978

6 820 117 070

(30)

(13)

(13)

na na

43 470 (13)

na

24 364

19 880

(16)

na

30

28

(11)

na

22

22

(13)

na

% %

3.7 12.9

1.3 7.3

(42)

2.7 na

2.3 12.7

0.6 6.6

(18)

(16)

(10)

1.9 na

$

24 000

28 860

(10)

na

31 210

28 440

(32)

na

(16)

Sheep industry 2003-04

2004-05 p

Beef industry 2005-06 s 2003-04

2004-05 p

2005-06 s

Total cash receipts Total cash costs

$ $

174 864 144 367

156 490 130 540

(11)

160 300 132 800

239 535 206 209

279 690 230 590

(10)

(11)

(12)

253 300 223 600

Farm cash income Farms with negative farm cash income

$

30 497

25 950

(24)

27 500

33 325

49 100

(24)

29 700

37

(15)

38

–6 270 (30)

–14 000

Farm business profit Farms with negative farm business profit Profit at full equity – excl. capital appreciation – incl. capital appreciation Farm capital at 30 June a Net capital additions Farm debt at 30 June b

%

37

41

(13)

38

35

$

–23 410

–21 310

(31)

–19 500

–18 883

%

74

74

(5)

66

73

$ $

–7 178 145 822

–7 290 (104) 99 490 (23)

–2 200 na

–2 767 192 161

$ 1 867 873 1 910 400 (8) $ 5 500 8 370 (255) $ 160 026 149 360 (20)

na 2 579 430 na 33 991 150 300 158 785

70

(6)

68

12 590 (202) 250 160 (12)

9 300 na

2 950 630 3 640 214 120

(6) (79) (10)

na na 211 300

continued …

196

australian commodities > vol. 13 no. 1 > march quarter 2006

farm performance

4

Financial performance, by industry Average per farm Broadacre and dairy industries

continued

Sheep industry cont’d 2003-04 Equity at 30 June bc Equity ratio bd Harvest loans at 30 June e Farm liquid assets at 30 June b Farm management deposits (FMDs) at 30 June b Share of farms with FMDs at 30 June b

2004-05 p

Beef industry cont’d

2005-06 s 2003-04

$ 1 674 326 1 681 150 % 91 92 $ 298 440 $ 97 871 82 780

(21)

na 2 186 793 na 93 na 239 na 137 887

$

13 814

15 370

(26)

na

16 191

%

18

20

(21)

na

18

Rate of return g – excl. capital appreciation – incl. capital appreciation

% %

–0.4 8.6

–0.4 (109) 5.5 (22)

–0.1 na

–0.1 8.2

Off-farm income of owner manager and spouse b

$

23 509

na

26 825

30 290

(8) (1) (75)

(12)

Sheep–beef industry Total cash receipts Total cash costs Farm cash income Farms with negative farm cash income Farm business profit Farms with negative farm business profit Profit at full equity – excl. capital appreciation – incl. capital appreciation Farm capital at 30 June a Net capital additions Farm debt at 30 June b Equity at 30 June bc Equity ratio bd Harvest loans at 30 June e Farm liquid assets at 30 June b Farm management deposits (FMDs) at 30 June b Share of farms with FMDs at 30 June b Annual payment from DSAP and SDAS f

2003-04

2004-05 p

$ $ $

253 786 207 525 46 261

266 330 211 720 54 610

% $

25 –8 267

%

69

2004-05 p 2 585 300 92 90 94 920

2005-06 s

(27)

na na na na

16 410

(24)

na

15

(27)

na

0.5 (202) 9.3 (11)

0.3 na

35 110

(7) (1) (78)

(12)

v

Dairy industry 2005-06 s 2003-04

2004-05 p

2005-06 s

321 709 260 983 60 726

352 940 269 670 83 270

(4)

(14)

244 100 210 700 33 400

31 (16) –2 290 (446)

37 –7 500

11 –14 158

7 19 890

(22) (30)

9 23 800

64

62

42

(11)

42

18 100 15 848 na 184 714 na 2 047 379 na 18 146 204 900 334 699 na 1 676 688

49 360 181 870 2 321 730 34 960 313 430 1 935 630

(13)

59

(6) (6)

(9)

$ 16 732 17 540 (59) $ 299 758 142 820 (17) $ 2 785 569 3 221 860 (6) $ 63 643 73 200 (52) $ 260 964 227 430 (15) $ 2 419 504 2 817 930 (6) % 90 93 (1) $ 7 551 60 (106) $ 103 305 98 550 (16)

(4) (6)

378 000 278 300 99 800

na

83

86

(1)

na na

0 88 057

0 77 410

(33)

58 800 na na na 317 900 na na na na

(9) (3) (26) (7) (3) (?)

$

20 306

15 590

(45)

na

11 240

10 630

(20)

na

%

27

18

(26)

na

16

18

(22)

na

15 634

15 321

(45)

na

$

Rate of return g – excl. capital appreciation – incl. capital appreciation

% %

0.7 12.2

0.6 4.7

(57)

0.6 na

0.9 9.9

2.3 8.5

(13)

(18)

(9)

2.5 na

Off-farm income of owner manager and spouse b

$

28 413

26 460

(9)

na

22 903

19 350

(15)

na

a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. f Dairy Structural Adjustment Program and Supplementary Dairy Assistance Scheme. g Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not available.

australian commodities > vol. 13 no. 1 > march quarter 2006

197

farm performance

Slaughter lamb industry Over the past decade, Australian sheep producers (farms with more than 200 sheep) have responded to higher lamb and mutton prices by increasing the production of lambs and adult sheep for slaughter. Consequently, the proportion of total cash receipts accounted for by sheep and lamb sales has steadily increased from an average of 5 per cent of farm receipts in 1990-91 to around 20 per cent in 2005-06. In 2004-05, around 39 000 broadacre farms had more than 200 sheep and these farms accounted for over 90 per cent of the Australian sheep flock. Of these, around half received some revenue from the sale of lambs for slaughter. Around a third these producers consistently receive more than 20 per cent of their on-farm broadacre agricultural receipts from the sale of lambs, and for the purposes of this report are considered to be ‘specialist’ lamb producers. Average farm cash income for specialist lamb producers is generally lower than that of nonspecialist producers, as specialist producers typically operate markedly smaller farms.

Farm cash income

Proportion of receipts from sheep and lamb sales Farms with more than 200 sheep

120 15

Non-specialist lamb producers

100 80

10

60 40

5

20

2005-06

%

Specialist lamb producers

US$/t 1989 -90

1993 -94

1997 -98

2001 -02

2005 -06

1990 -91

1993 -94

1996 -97

1999 -2000

2002 -03

2005 -06

In 2005-06, reduced turnoff of lambs in combination with lower wool, lamb and grain prices is expected to result in average farm cash income of specialist producers falling. In contrast, sheep and lamb turnoff is expected to increase for nonspecialist lamb producers as they continue to change the emphasis of their enterprise toward cropping. High turnoff and a marked increase in crop production are projected to result in a higher average farm cash income for nonspecialist lamb producers. Physical and financial performance indicators, slaughter lamb producers Average per farm Specialist producers

Nonspecialist producers

All producers

2003-04 2004-05 2005-06 2003-04 2004-05 2005-06 2003-04 2004-05 2005-06 Area operated, 30 June Number of sheep, 30 June Number of sheep sold Number of lambs sold

ha no. no. no.

Farm financial performance Total cash receipts – lambs – adult sheep Total cash costs Farm cash income Farm business profit

$ $ $ $ $ $

Rate of return – excl. capital appreciation % – incl. capital appreciation Population Sample

% no. no.

198

AC_March06_FarmPerformanceArticl198 198

1 069 2 411 1 773 1 509

1 386 2 213 1 301 1 059

1 155 1 876 1 234 940

2 072 2 570 955 555

2 139 2 421 1 054 564

1 939 2 392 1 162 670

1 899 2 542 1 096 720

1 838 2 338 1 152 761

1 638 2 194 1 190 774

323 454 235 750 212 000 365 255 405 220 444 000 358 051 337 650 354 800 131 700 84 850 66 600 44 123 43 230 44 800 59 215 59 830 53 100 14 003 13 000 18 600 23 210 25 270 28 900 21 624 20 380 24 900 216 683 184 200 168 200 256 506 326 500 338 900 249 643 269 760 273 300 106 771 51 550 43 800 108 749 78 720 105 100 108 408 67 890 81 600 49 379 –6 460 –3 300 37 683 –6 560 31 100 39 698 –6 520 17 900 2.4 14.2

0.5 3.6 7 410 146

0.7 na

2.3 10.6

0.9 6.0 11 175 291

2.2 na

2.3 11.2

0.8 5.3

1.8 na

18 585 437

australian commodities > vol. 13 no. 1 > march quarter 2006

27/2/06 9:51:35 AM

farm performance increase in farm costs. Consequently, farm cash income is expected to increase by around 6 per cent in 2005-06.

Sheep–beef industry Drought in 2002-03 and 2004-05 had a relatively more severe impact on this industry, because of the location of a high proportion of farms in this industry in the regions of New South Wales and Queensland that were most severely affected by drought. The reduction in sheep numbers, particularly in Queensland, was very large. In 2003-04, many Queensland producers did not rebuild sheep numbers and mainly increased beef cattle numbers, effectively moving from the sheep–beef industry to the beef industry. In other states, both sheep and beef cattle numbers increased as turnoff was reduced, subduing increases in farm cash income. Dry seasonal conditions and high cattle, sheep and lamb prices in 2004-05 encouraged an increase in the turnoff of both sheep and beef cattle and resulted in a marked increase in farm cash income. However, in 2005-06 turnoff of both beef cattle and sheep is projected to fall as producers rebuild livestock numbers. The reduction in projected beef cattle turnoff is much larger than that expected for sheep as producers continue to increase beef cattle numbers in preference to sheep. In addition, a reduction in wool cut per head is expected, lowering wool production. This combined with further weakening in wool prices is expected to result in wool receipts falling by over 10 per cent in 2005-06. Livestock purchase costs were historically high in this industry in 2004-05 and are projected to fall slightly in 2005-06. Improved seasonal conditions are also expected to result in a substantial reduction in expenditure on fodder. However, outlays on fuel, fertiliser and freight are expected to increase. Overall, farm cash income is projected to fall in 2005-06 to below the long term average, in real terms. But, with increases in sheep and beef cattle numbers, farm business profit is expected to remain close to the long term average.

Beef industry Beef cattle turnoff was relatively high in 2004-05 as producers responded to high cattle prices, but increased fodder expenditure because of drought in many regions resulted in farm cash incomes remaining only just above the longer term average. In 2005-06, beef cattle turnoff is projected to fall, particularly in Queensland, as herds are rebuilt. Reduced turnoff of cattle in combination with a small reduction in cattle prices is expected to result in beef industry cash receipts falling by around 9 per cent. At the same time, cash costs are projected to stay high, mainly because of continued high expenditure on purchases of beef cattle, fuel and freight. Hence, beef industry farm cash income is projected to fall significantly, to be below the longer term average. Farm business profit is also expected to fall. The beef industry is the most widespread agricultural industry in Australia and contains farms with a very wide range of herd sizes. Because a very large proportion of beef industry farms have relatively small herds this results in the average performance of the industry being heavily influenced by the generally poorer performance of small farms. Table 3 contains farm performance results for the beef industry divided into two groups — those farms with less than 300 beef cattle and those with more than 300. The financial performance of larger herd size farms is more comparable with that of other industries that do not contain so many small farms. Farm performance estimates are also provided for small and

australian commodities > vol. 13 no. 1 > march quarter 2006

199

farm performance large flock size sheep industry farms because the sheep industry also contains many relatively small farms. A similar pattern is also evident in that industry. Increases in land values in northern pastoral areas of Australia have been particularly large in recent years. These increases have resulted in high rates of return including capital appreciation for larger herd size farms (table 3).

Dairy industry Average farm cash income for the dairy industry recovered in both 2003-04 and 2004-05 from the low recorded in 2002-03 (figure C). Average farm cash income increased in 200304 despite a fall in milk prices. This was largely based on improved grazing conditions and much lower feed costs. In 2004-05, milk prices and production increased, resulting in higher farm cash receipts. Further improvement to seasonal conditions, lower feed grain prices and increased irrigation water availability kept increases in cash costs relatively small. These factors extended the recovery in average farm cash Dairy industry income for dairy industry farms into 2004-05. Average farm cash income for dairy industry farms nationFarm cash income ally is forecast to increase to be above the long term average 90 in 2005-06 (table 4, figure C). Higher milk prices and further improvement in seasonal conditions is projected to result in an 60 increase in milk production and a strong rise in farm receipts. 30 Farm cash costs are forecast to increase by 3 per cent as 2005-06 producers increase purchased feed use to boost milk produc$’000 tion. Outlays on fuel, fertiliser and freight are also expected to increase. –30 The increase in average dairy farm cash income in recent Farm business profit –60 years is not just the result of improvement in seasonal condi1980 1985 1990 1995 2000 2005 tions and increases in prices, but also reflects the exit from the -81 -86 -91 -96 -01 -06 industry of higher cost producers.

C

Farm investment In recent years, broadacre agriculture has undertaken considerable investment in farm capital. The main investments undertaken have been the purchase of additional land and plant and machinery to expand farm scale and to strengthen future financial viability. Much of this investment has been financed by borrowing funds, with liquid assets having been reduced to minimise borrowings. While total farm debt has increased markedly in recent years, the average farm’s ability to service its debts, as measured by the receipts to debt ratio, has remained manageable as average farm cash receipts have grown and interest rates have remained low. Also, strong capital appreciation in the value of farm land in recent years has resulted in farm equity remaining at historically high levels.

Land transactions The period 1998–2004 was characterised by a large number of land transactions on rural holdings. More than 5 per cent of Australian broadacre farms expanded their farm area each year between 1997-98 and 2003-04. However, in 2004-05 there was a significant decline in the proportion of broadacre farms expanding (figure D) as rising land values reduced the financial attractiveness of this business strategy. Also, weaker commodity prices and lower turnoff of livestock constrained cash flow and farm incomes. 200

AC_March06_FarmPerformanceArticl200 200

australian commodities > vol. 13 no. 1 > march quarter 2006

6/3/06 10:21:43 AM

farm performance Producers in the beef industry have been particularly strong buyers of land, as incomes have been high for a prolonged period, especially in northern Australia. While beef producers in southern Australia have been net purchasers of land, a significant amount of high value land has also been sold to the nonfarming sector. Despite the reduction in land trading activity in 200405, average land values for broadacre farms continued to increase (figures E, F). The strongest growth occurred in pastoral northern Australia and the high rainfall zone of southern Australia. Average land values for broadacre farms increased by 10 per cent in 2004-05. Between June 2001 and July 2005, average real land values increased by over 70 per cent. The general increase in land values has resulted from a number of factors including higher farm incomes, historically low interest rates and a positive outlook for future industry returns. Following a sharp fall in land values in 1990-91 (figure E) in response to reduced commodity prices, including the collapse of the wool reserve price scheme, average real land values increased only slightly in the decade between 1990-91 and 2000-01. However, over the same period, real farm cash incomes increased significantly (figure A), particularly in the wheat–sheep zone and pastoral areas of northern Australia. Another factor stimulating rural land values in recent years has been a steady increase in demand for land by urban Australians seeking a rural lifestyle and investment.

Additions of plant, machinery and other capital While the number of farm businesses buying land fell in 2004-05, additions of plant, machinery, vehicles and farm improvements remained relatively high (figure G). In line with land transactions, beef industry farms were particularly active buyers of plant and machinery. Conversely, acquisitions fell in the cropping industry as weaker grain prices reduced farm incomes.

Farm business debt Since 1990-91, significant capital investment has been undertaken by Australian farmers. Some of this has been financed from farm profits and liquid assets, but the majority via increased borrowings. As these investments have been integrated into the farm production systems, significant growth in average farm cash receipts has been realised (figure H). Consequently, debt servicing ability (as indicated by the receipts to debt ratio) has not deteriorated markedly during this period.

australian commodities > vol. 13 no. 1 > march quarter 2006

D

Proportion of farms acquiring land

8 6 4 2 % 1980 -81

E

1986 -87

1992 -93

1998 -99

2004 -05

Land prices Broadacre farms

350 300 250 200 150 100 2005-06

$/ha 1979 -80

F

1984 -85

1989 -90

1994 -95

1999 2004 -2000 -05

Land prices Broadacre farms

400 300 200

High rainfall

Pastoral

100 Wheat–sheep index 1979 -80

1984 -85

1989 -90

1994 -95

1999 2004 -2000 -05 201

farm performance

G

Net additions of plant, machinery, vehicles and improvements

25 20 15 10 5 2005-06

$’000 1988 -89

H

1992 -93

1996 -97

2000 -01

2004 -05

Farm business debt and farm receipts Broadacre farms Total cash receipts – farms with debt

300

200

100 Farm business debt – farms with debt

2005-06

Total cash receipts – farms with no debt

$’000 1979 -80

I

1984 -85

1989 -90

1994 -95

1999 2004 -2000 -05

Farms increasing debt Broadacre farms

50 40 30 20 10 % 1988 -89 202

1992 -93

1996 -97

2000 -01

2004 -05

Relative to farms with debt, farms with no debt consistently earned lower average farm cash receipts and were unable to generate significant growth in receipts, in real terms, during the period 1977-78 to 2004-05 (figure H). In 2004-05, the average farm without debt was generally the same size as farms with debt, in terms of the amount of land owned. However, farms free of debt appear to be operated at a much lower level of intensity, as measured by dry sheep equivalents per hectare. There is also a markedly lower emphasis placed on cropping activities. Reflecting the less intensive nature of these operations, cash costs are also much lower, with the result that average farm cash income for farms without debt is similar to farms with debt. Given their lower capacity to service debt, farms without debt generally invest in new capital by accumulating profits over a number of years. In 2004-05, the average farm without debt had accumulated over $160 000 in farm liquid assets, almost twice the average of farms with debt. However, the rate of land acquisition by this group is much lower. Only 1.5 per cent of farms without debt acquired additional land in 2004-05, compared with 4.5 per cent of farms with debt. Farm business debt rose sharply in 2002-03 for broadacre farms, partly because the drought reduced cash flow and forced some producers to borrow to raise working capital. However, another contributing factor was a continued high level of investment in capital to boost the farms production capacity and strengthen longer term financial viability. While average farm debt increased over the three years since 2001-02, the proportion of farms increasing debt fell markedly (figure I). This largely reflects the decline in the number of farms acquiring additional land (figure D) and the use of liquid assets and cash flow to finance investments in plant and machinery. In 2004-05, around 37 per cent of broadacre farms increased debt, with over 60 per cent of the funds used to finance new investments, particularly the purchase of land, vehicles and farm machinery. Almost all of the remainder was used to provide working capital. In this paper, farm business debt excludes debt that is underwritten, including harvest loans and dairy structural adjustment advances. Inclusion of harvest loans in estimates of farm business debt results in substantial falls in farm debt for grain producing farms in drought years as crop production is reduced, masking increases in working capital debt that usually occur. Conversely, debt increases in years of high crop production when cash flow is also high. Harvest loans and dairy structural adjustment payments are reported separately from other farm business debts in the tables in this paper. australian commodities > vol. 13 no. 1 > march quarter 2006

farm performance Increased farm capital values as a consequence of rising prices for rural land in recent years have offset the impact of increases in farm debt on farm equity, resulting in farm equity ratios being historically high. Broadacre farm equity at 30 June 2005 is estimated at 90 per cent, an average equity ratio last recorded in the late 1980s.

Farm liquid assets Assets available to farm businesses to meet short term funding needs include bank deposits, farm management deposits, shares and other investments readily convertible to cash. While liquid asset levels are currently high, they are estimated to have been reduced in 2004-05. Much of these funds were used to finance capital investments in place of borrowed funds (figure J). The reduction in liquid assets was largest for farms in the mixed livestock–crops and beef industries.

Use of farm management deposits Farm Management Deposits (FMDs) were introduced by the Australian Government as a cash and risk management tool for Australia’s primary producers. FMDs allow farmers to set aside pretax primary production income so they can spread their income between years. Tax benefits normally accrue if Farm liquid assets and farm the deposits are held for a minimum of twelve months, but management deposits Broadacre farms from December 2002 farmers in exceptional circumstances declared areas have been able to withdraw deposits within Farm management deposits twelve months and still be eligible for tax benefits. Deposits 120 Liquid assets exhibit a strong cyclical pattern, with the June quarter being 100 the strongest period for net deposits and the September 80 quarter the largest for net withdrawals (figure K). The amount held in FMDs grew steadily until June 2002 60 when a huge influx of deposits at the close of the 2001-02 40 financial year boosted deposits by almost $1 billion to just over $2 billion (figure K). Average incomes for producers in 20 2001-02 were at record levels and many producers used 2005-06 $’000 FMDs as a tax effective means of retaining profits. However, 1988 1992 1996 2000 2004 drought in 2002-03 combined with the subsequent cost of -89 -93 -97 -01 -05 rebuilding livestock numbers and weaker commodity prices has served to significantly subdue the growth in FMDs in more Farm management deposits and recent years. By June 2005, aggregate statistics on FMD number of account holders use published by the Department of Agriculture, Fisheries and Quarterly, ended September 2005 Forestry indicate deposits of $2.8 billion with 43 309 FMD accounts. On broadacre farms, these same factors led to Value of FMDs held 2500 50 a reduction in other liquid assets. FMDs held by broadacre farms have changed little over the past two years (figure J). 2000 40 Because most farms have more than one individual with a share in the farm’s income, the number of farms with deposits 1500 30 is substantially less than the number of accounts. ABARE farm Number of 1000 20 FMD accounts surveys indicate that around 20 per cent of broadacre farms and around 18 per cent of dairy farms held farm management 500 10 deposits at 30 June 2005. At 30 June 2005, the majority of deposits were relatively small. Around 40 per cent of the ’000 $m farms with an FMD account had less than $50 000 deposDec Dec Dec Dec Dec Dec

J

K

1999 australian commodities > vol. 13 no. 1 > march quarter 2006

2001

2003

2005 203

farm performance ited. However, around 17 per cent of broadacre farms with an account had deposited more than $200 000. According to ABARE’s broadacre farm survey data, farms with farm management deposits are larger in terms of their enterprise scale and more profitable than farms that do not hold FMDs. On average, farms holding FMDs have higher farm cash income, higher net assets and higher rates of return. However, they also have higher debt levels and, in 2002-03 and 2003-04, received more government assistance payments (via the exceptional circumstances assistance) than farms without FMDs. Farms with FMDs also have lower off farm income. However, this is likely to be an artefact of the criterion that only producers with less than $50 000 of off farm income are eligible for FMDs.

Investment returns Returns on investment in agricultural industries are often low when reported across a whole industry. However, low average returns are partly a consequence of the generally high proportion of small farms in many industries, particularly the beef and sheep industries. The presence of these small farms masks the much higher returns from better performing and larger farms that generate the majority of each industry’s output. The average returns from these better performing and larger farm businesses are frequently comparable with investment returns elsewhere in the Australian economy. Table 5 provides average rates of return for broadacre and dairy farms ranked and classified to classes according to the total capital invested in the farm in the period 2002-03 to 2004-05. In large part, poorer rates of return for small farms are a consequence of their physical size and resource endowment limiting them to the generation of low farm cash incomes. Also, these producers frequently operate relatively high priced land because of their proximity to regional centres. The location of many of these smaller farms may result in relatively high capital gains periodically, but relatively few generate rates of return (excluding capital appreciation) comparable with the returns of larger farms (table 5). Generally, larger farms generate higher receipts and have lower costs relative to the amount of capital invested. As a consequence, rates of return are higher. Higher receipts and lower costs per unit of capital used also appear to explain why cropping farms within a particular capital class generally generate higher rates of return than livestock farms with a comparable level of investment. Many factors contribute to a farm’s financial performance exceeding the industry average, including seasonal conditions. Farming practices and the willingness of the farm operator to innovate and adopt new practices is also likely to be significant. Land management and marketing success can be strongly affected by a producer’s access to and response to information. Better performing producers invest more time in updating information and in discovering new farming practices by participating in learning activities like conferences, workshops and demonstration and field days. They are also more likely to implement changes to farm management practices.

Drought assistance Government policy in Australia embodies the principle that farmers should be responsible for the management of their farm business and associated risks such as drought. Accordingly, farmers have been encouraged and assisted to improve farm financial and land use planning, including risk management, particularly through the Australian Government’s Agriculture Advancing Australia (AAA) program. This program also includes a mechanism to build cash 204

australian commodities > vol. 13 no. 1 > march quarter 2006

farm performance

5

Rates of return for broadacre and dairy farms, by total farm capital Average per farm Bottom third a

All broadacre Total farm capital at 30 June Farm cash income Farm business profit Rate of return e – excl. capital appreciation – incl. capital appreciationn Wheat and other crops Farm cash income Farm business profit Rate of return e – excl. capital appreciation – incl. capital appreciation Mixed livestock crops Farm cash income Farm business profit Rate of return e – excl. capital appreciation – incl. capital appreciation Sheep Farm cash income Farm business profit Rate of return e – excl. capital appreciation – incl. capital appreciation Beef Farm cash income Farm business profit Rate of return e – excl. capital appreciation – incl. capital appreciation Sheep–beef Farm cash income Farm business profit Rate of return e – excl. capital appreciation – incl. capital appreciation Dairy Farm cash income Farm business profit Rate of return e – excl. capital appreciation – incl. capital appreciation

Middle third b

Top third c

Average

Top 25% d

Average

Top 25% d

Average

Top 25% d

$m $ $

0.8 16 464 –29 354

1.1 67 985 30 823

1.7 45 437 –19 006

2.1 144 210 94 034

4.7 115 947 14 043

5.6 35 3135 29 3000

% %

–2.5 5.8

3.9 12.6

–0.3 7.7

5.7 12.9

1.2 8.0

6.4 13.0

$ $

43 105 –9 765

97 868 48 204

103 031 14 962

210 500 137 869

219 546 82 724

47 0024 34 4186

% %

0.2 6.9

5.1 12.8

1.9 8.8

7.3 14.9

3.0 8.3

7.8 13.6

$ $

32 871 –19 896

72 902 29 764

52 436 –12 944

143 429 82 344

137 309 20 240

34 5645 24 9952

% %

–1.1 8.3

3.9 15.1

0.4 8.8

5.3 12.1

1.5 8.0

5.9 13.6

$ $

3 197 –36 810

42 331 15 282

33 966 –21 722

117 504 72 369

49 810 –22 875

19 9632 16 9831

% %

–4.9 2.6

2.7 11.9

–0.8 7.4

5.4 13.4

0.2 8.2

5.1 13.4

$ $

–3 134 –40 675

23 740 12 544

18 063 –38 077

66 573 64 463

93 200 –4 087

32 6630 37 9199

% %

–5.4 4.5

2.8 9.6

–2.1 7.1

3.9 13.2

0.6 8.1

6.0 12.2

$ $

8 353 –43 967

36 386 14 610

33 358 –28 644

93 046 66 881

65 974 –4 674

20 4312 24 8764

% %

–3.3 4.2

1.9 6.8

–0.5 5.0

4.0 7.6

0.7 6.9

5.0 10.2

$ $

37 287 –24 401

72 592 23 195

56 961 –17 655

126 846 68 347

89 178 –5 562

19 0078 12 3686

% %

–1.1 4.6

3.8 8.2

0.5 9.6

5.1 13.3

1.2 6.9

5.2 10.4

a Less than $1 million at 1 July 2002, less than $1.2 million at 1 July 2003 and less than $1.4 million at 1 July 2004. b $1.0–2.0 million at 1 July 2001, $1.2–2.4 million at 1 July 2002 and $1.4–2.7 million at 1 July 2003. c More than $2.0 million at 1 July 2001, more than $2.4 million at 1 July 2002 and more than $2.7 million at 1 July 2003. d Ranked at regional level by rate of return to capital excluding capital appreciation. e Calculated as farm business profit plus interest and leasing expenses paid as a percentage of the total value of capital at 1 July.

australian commodities > vol. 13 no. 1 > march quarter 2006

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farm performance reserves for use during drought and other downturns through the Farm Management Deposit (FMD) scheme. In addition, federal, state and territory governments responded to the widespread drought commencing in 2002-03 with a range of measures targeting farm businesses and the welfare needs of farming families. Federal assistance during recent drought events has been mainly based on the declaration of ‘exceptional circumstances’ (EC) on a region by region basis. Exceptional circumstances declarations are intended to provide assistance for events whose rarity and severity is such that they are beyond the scope of normal risk management, the type of event that can be expected to occur only once or twice in a lifetime. Farmers in EC declared areas are eligible to apply for household welfare assistance (termed Exceptional Circumstances Relief Payment [ECRP] and equivalent to Newstart welfare available to all Australians except that farm assets are excluded from eligibility tests) as well as business assistance. Business assistance is offered in the form of interest subsidies on new and existing loans up to a maximum of $100 000 in any twelve month period, with a cumulative maximum of $300 000 over the previous five years. Changes were made to EC drought assistance during 2005 to enable more farmers to qualify for welfare and business assistance in 2005-06. The income test for Exceptional Circumstances Relief Payments has been relaxed so that farmers can earn an extra $10 000 in off-farm salaries and wages without affecting their relief payment until June 2006. Interest rate subsidies were increased from 50 per cent to 80 per cent of the interest paid on new and existing loans for those farmers in areas currently EC declared for a second or subsequent year. In addition, the off-farm assets test threshold for interest subsidies was doubled to $446 000 per farm business.

Characteristics of Exceptional Circumstances assistance recipients ABARE survey data for the 2004-05 financial year for farms in areas declared for exceptional circumstances assistance by 30 June 2004 (see map) have been used to document the characteristics of recipients of the various forms of EC assistance and the impact of this assistance on the farm and farm household’s financial position. The characteristics of EC recipients to 2003-04 were reported in Australian Farm Surveys Results 2002-03 to 2004-05 in March 2005. In the following section, preliminary results for farms in EC declared areas obtained from the 2004-05 data collection for broadacre and dairy farms are discussed. All data presented are for farms in areas and specific industries declared for EC assistance for the full 2004-05 year. Exceptional circumstances declared or

interim declared areas at 30 June 2004

Exceptional circumstances interest rate subsidy (ECIRS) Obviously, the farms that receive the greatest assistance from the ECIRS are farms with the most debt (table 6). Generally, farm businesses with the largest debt are also the largest farms, have the greatest capacity to service debt and have sound long term prospects. The profile of their farm debt indicates that the majority of their farm debt is for farm expansion, farm development and investment in new technology. Often they are also operated by younger farmers in the expansionary phase of their careers. Farms with low or no debt and relatively high levels of liquid assets receive much less assistance from the ECIRS.

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australian commodities > vol. 13 no. 1 > march quarter 2006

farm performance However, a small proportion of farms receiving ECIRS have low receipts, low equity, and poorer prospects of long run viability. For these farms, this assistance may provide the opportunity to choose the timing of their decision to leave farming. With a return to better seasonal conditions it is likely that some farmers who have been contemplating the sale of land through the drought period will now list their properties for sale.

Exceptional circumstances relief payment The second form of assistance is means tested family household support provided through the Exceptional Circumstances Relief Payment (ECRP). Around 50 per cent of farms receiving ECIRS also receive ECRP. Generally, recipients of either interest subsidies or ECRP recorded lower farm production in 2004-05. Crop yields were lower for farms in EC declared areas in receipt of EC assistance, as was wool cut per head shorn, and sheep and beef cattle turnoff rates. As a consequence, total cash receipts for EC recipients were significantly below the average for nonrecipients,

6

Estimates for broadacre and dairy farms in EC declared areas, 2004-05 Average per farm Farms receiving interest subsidy

Wheat yield per hectare sown

Farms not receiving interest subsidy

Farms receiving ECRP

Farms Farms Farms not receiving receiving receiving any EC no EC ECRP assistance assistance

tonnes

1.4

1.7

1.4

1.7

1.5

1.7

$ $ $ $

294 800 256 400 38 400 –15 600

255 500 203 900 51 600 –3 700

207 500 176 000 31 400 –22 600

271 000 216 500 54 600 – 800

223 900 190 800 33 100 –21 500

269 700 214 300 55 300 0

Total cash receipts less Total cash costs Farm cash income Farm business profit Rate of return – excl. capital appreciation – incl. capital appreciation Proportion of farms with negative farm cash income

% %

1.0 8.8

0.7 7.4

0.1 7.9

0.8 7.5

0.2 8.2

0.8 7.4

%

28

33

26

34

27

34

Total capital value Farm debt at 30 June Change in farm debt during year Change in working capital debt during year

$ 2 511 500 2 479 900 1 989 500 2 594 900 2 132 800 2 585 500 $ 476 600 224 000 290 400 239 400 325 500 226 500 % 4 0.4 3 12 3 13 % 40 37 13 6 17 4

Equity ratio at 30 June Liquid assets, including FMDs Farm management deposits at 30 June Change in FMDs during year Investment income Wage and salary income Exceptional circumstances relief payment Other government sourced income

% $ $ % $ $ $ $

81 30 000 2 600 9 6 300 8 800 8 800 3 100

91 103 000 15 300 36 8 300 19 100 1 600 1 900

85 34 500 3 600 62 7 200 4 800 11 700 3 000

90 110 300 16 400 34 8 300 21 300 0 1 800

84 35 400 3 600 45 6 800 6 300 9 600 3 100

91 114 100 17 100 35 8 500 21 800 0 1 600

Total off-farm income

$

27 000

30 800

26 600

31 400

25 800

31 900

Government assistance payments to business – total EC interest subsidy to business Other government business assistance

$ $ $

20 400 16 800 2 100

1 300 0 800

9 100 5 100 2 500

1 800 800 600

10 900 7 200 2 300

900 0 600

Areas declared for EC at 30 June 2004 Source: ABARE Australian agricultural and grazing industries survey and Australian dairy industry survey.

australian commodities > vol. 13 no. 1 > march quarter 2006

207

farm performance even after the receipt of the interest subsidy. However, the margin between total cash receipts and costs was much narrower for EC recipients partly because fodder costs of EC recipients were almost double those of nonrecipients. Farm cash income for EC recipients, together with farm business profit and rate of return (excluding capital appreciation) were significantly below those of nonrecipients. However, there was little difference in the percentage of farms recording negative farm cash income between the two groups. While debt levels are higher on farms receiving EC assistance, the overall increase in debt during 2004-05 was less in percentage terms than that on farms not receiving EC assistance. However, the percentage increase in debt for working capital was significantly higher and the overall proportion of total farm debt for working capital on farms receiving EC assistance was much higher than for farms not receiving EC assistance. While the average equity ratio of farms receiving EC assistance was lower than that for farms not receiving assistance, less than 1 per cent had less than 70 per cent equity. Liquid assets and farm management deposits (FMDs) held by farms receiving EC assistance were, on average, much lower than for farms not receiving assistance. FMDs increased for both farms receiving EC assistance and farms not receiving EC assistance, but the increase was marginally greater for farms receiving EC assistance. Overall, farms appear to have chosen debt financing or a reduction in other liquid assets (see figure J) to fund farm cash operating shortfalls in preference to the withdrawal of FMDs. The age of the farm operator was not significantly different between those farms that do or do not receive EC assistance. Age is, however, a significant explanator of differences in the composition of farm debt, with a higher proportion of debt for land purchase on farms operated by younger farmers.

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australian commodities > vol. 13 no. 1 > march quarter 2006

Doha Round

> Don Gunasekera > +61 2 6272 2366 > [email protected]

multilateral trade reform potential trade impacts of the Doha Round Roneel Nair, Daniel McDonald, Andrew Jacenko and Don Gunasekera

> Achieving an ambitious outcome in the WTO Doha Round of agricultural negotiations would potentially have considerable benefits for the global community, including Australia. > Two illustrative trade liberalisation simulations (a more market oriented simulation and a less market oriented simulation) based on the negotiating proposals put forward by WTO members since October 2005, provide some broad insights into possible outcomes. > A more market oriented Doha Round outcome would generate a greater increase in trade than a less market oriented outcome, increasing the value of world agricultural trade by an estimated US$30 billion and US$6 billion respectively. > A more market oriented outcome would increase the value of major Australian agricultural exports by an estimated 15 per cent and expand Australian agricultural producer gross incomes by around 8 per cent.

Introduction The WTO Doha Round of agricultural trade negotiations G10 group is at a crossroad. Disparity in reform ambition of WTO Bulgaria, Chinese Taipei, Iceland, Israel, Japan, members is causing contention in the agricultural negotiaRepublic of Korea, Liechtenstein, Mauritius, tions. The stakes are high in the WTO negotiations and Norway and Switzerland. this is reflected in the estimated potential economic benefits from farm policy reform to the global community, including G20 developing countries Argentina, Bolivia, Brazil, Chile, China, Cuba, Australia (see table 1). The outcome of the Doha Round of Egypt, Guatemala, India, Indonesia, Mexico, agricultural trade negotiations will determine the extent to Nigeria, Pakistan, Paraguay, Philippines, South which these benefits are likely to be realised in the future. Africa, Tanzania, Thailand, Uruguay, Venezuela The reluctance to reduce high market access barriers and Zimbabwe. and significant levels of domestic support in key countries that pursue distorting farm policies is continuing to stifle trade opportunities and is a major impediment to achieving tangible benefits in efficient agricultural exporting countries, including Australia. The magnitude of the potential gains for Australia from any possible outcomes at the WTO round will depend on the nature and extent of improvements in market access and reductions in domestic support in key countries that pursue distorting farm policies. Prior to the Hong Kong WTO Ministerial meeting in December 2005, several negotiating proposals for global agricultural trade reform were put on the table, including those by the United States, the European Union and the G20 group of developing countries. australian commodities > vol. 13 no. 1 > march quarter 2006

209

Doha Round

1

Recent analyses of potential economic benefits of trade reform

Estimated world benefits in real terms

Implementation period for liberalisation

Year for which estimated benefits are reported

US$b Analyses

Key assumptions

OECD

65% agricultural trade liberalisation by OECD countries (simulated using OECD’s GTAPEM model)

30 a

2001–15

2015

Agricultural trade liberalisation under the US’ WTO negotiating proposal (simulated using ABARE’s GTEM model)

24 b

2006

2006

(Tangerman 2005)

ABARE (Nair et al. 2005)

a In 2001 dollars. b In 2004 dollars.

It is important to recognise that there is a unique opportunity for the United States to change its farm policies as the Doha Round is occurring concurrently with consideration of a new US farm bill scheduled for 2007. The coincidental timing presents an opportunity for the United States to shape a new farm bill that improves the overall welfare of its farm sector and generates gains for others (Nair et al. 2005). Prior to the Hong Kong Ministerial meeting, the G10 group of countries and the African, Caribbean and Pacific (ACP) group of countries also put forward separate negotiating proposals. All the negotiating proposals currently being considered are characterised by different levels of ambition in terms of improvement in market access and reduction in domestic support. Subsequently, agreement was reached at the Hong Kong Ministerial meeting on eliminating agricultural export subsidies by 2013 (see box 1). Furthermore there are several areas such as the provisions for sensitive products and special products in market access negotia-

Box 1: Key outcomes of the Hong Kong Ministerial meeting Agreement among WTO Members Market access Four bands for structuring cuts to bound tariffs (the maximum rates that WTO members agree not to exceed), with each band covering a different range of initial tariffs. Domestic support Three bands for reduction in the aggregate measurement of support (AMS) and in overall trade distorting domestic support, with larger cuts in the highest bands: > > >

band 1 – the member with the highest level of support band 2 – the two members with the second and third highest levels of support band 3 – all other members

Developed country members in the lower bands with high levels of AMS relative to their total value of agricultural production will make an additional cut in AMS. Export subsidies The parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect to be completed by the end of 2013. All forms of export subsidies for cotton will be eliminated by developed countries in 2006. Source: WTO (2005)

210

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Doha Round tions, and disciplines on blue box, that are complex and need further clarification. Hence, there is still a substantial amount of unfinished business before any meaningful outcome on market access and domestic support can be progressed. It is not clear what the final outcome of the Doha Round will be. Hence any analysis of possible outcomes will be indicative only. The only available information that may provide some broad insights into the range of respective positions of key members of the WTO is the negotiating proposals that have been put on the table since October last year (see box 2). Given this background, two illustrative trade liberalisation simulations — based on the underlying key elements (such as the tariff and domestic support reduction approaches, tariff caps and the treatment of sensitive products) of the negotiating proposals currently being considered — are examined and the potential implication for global trade and for the Australian farm sector analysed.

Drivers of benefits from reform Australian farmgate prices for many agricultural products are heavily influenced by world market conditions. One major factor behind world market conditions for agriculture is govern-

Box 2: Key elements of the US, EU and G20 negotiating proposals Market access United States

European Union

G20

Bound tariff cuts of 55–90% (maximum cuts where bound tariffs are over 60%)

Bound tariff cuts of 35–60% (maximum cuts where bound tariffs are over 90%)

Bound tariff cuts of 45–75% (maximum cuts where bound tariffs are over 75%)

Tariffs capped at 75% for developed countries

Tariffs capped at 100% for developed countries

Tariffs capped at 100% for developed countries

1% of total agricultural tariff lines can be nominated as ‘sensitive products’

8% of total agricultural tariff lines can be nominated as ‘sensitive products’ A ‘pivot’ allows the flexibility to take cuts smaller than 35% on many lower range tariffs

Domestic support United States

European Union

G20

Cuts to overall trade distorting domestic support of 75% in the first band, 53% in the second band and 31% in the third band

Cuts to overall trade distorting domestic support of 70% in the first band, 60% in the second band and 50% in the third band

Cuts to overall trade distorting domestic support of 80% in the first band, 75% in the second band and 70% in the third band

Cuts to AMS of 83% in the first band, 60% in the second band and 37% in the third band

Cuts to AMS of 70% in the first band, 60% in the second band and 50% in the third band

Cuts to AMS of 80% in the first band, 70% in the second band and 60% in the third band

‘Blue box’ capped at 2.5% of the total value of agricultural production

‘Blue box’ capped at 5% of the total value of agricultural production

Reduce de minimis support by 50%

Reduce de minimis support by 80%

Note: Given that agreement was reached on the elimination of export subsidies at the Hong Kong Ministerial meeting, elements of the proposals relating to export subsidies are not reported here. Sources: European Commission (2005); ICTSD (2005); USTR (2005).

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Doha Round ment policy among key countries that pursue distorting farm policies. Given this, the potential opportunities for sizable increases in the value of Australian agricultural exports through a Doha Round outcome will be influenced by a number of key factors.

Policies restricting trade in some of Australia’s key markets Potential benefits to the Australian farm sector from agricultural trade liberalisation will depend on the nature and extent of reductions in high market access barriers in some key markets and cuts to both the export subsidies and significant levels of domestic support of key competitors (see box 3).

Size of tariff cuts The extent of reductions in tariffs will influence the extent of potential benefits from farm policy reform. If market access barriers such as high bound tariffs could be significantly reduced globally, the prices received by many Australian farmers would increase. In addition, studies have postulated that a reduction in agricultural support including market access barriers would reduce the variability in world prices (Tyers and Anderson 1992). The reasoning behind this postulation is that farmers in countries with high tariff barriers are cushioned from world prices and therefore do not adjust production as much as would otherwise occur. In addition, consumers in those countries often face prices well above world market prices. Because of this, the remainder of the world market is forced to bear the burden of adjustment, which makes prices more volatile with high levels of protection (Podbury et al. 2005).

Avoiding the use of sensitive farm products provision If key protectionist countries exempt the politically sensitive farm products from significant tariff cuts, some of the prospective gains to Australian agricultural exporters could evaporate. The July 2004 Framework Agreement of the WTO has recognised that developed countries have sensitive products that will be subject to the principle of substantial improvement in market access through a combination of tariff quota expansion and tariff reductions. Some developed countries are working to minimise substantial market access improvements for these products, which will act to constrain potential benefits from the round. As part of special and differential treatment afforded to developing countries, there is a special products category for which tariffs will be subject to lesser cuts. Coupled with the new developing country special safeguard mechanism, these provisions have the potential to undermine global benefits from the round.

Removal of special safeguard provisions Efficient agricultural exporters such as Australia would benefit if market access restricting mechanisms that are already in place, namely special safeguards and effective import restraints through tariff quota administration, were removed. If such restrictive mechanisms were not removed they would continue to undermine outcomes that could otherwise be favorable. When import prices drop sharply or if there is a significant increase in imports, the special safeguard provisions enable WTO members to temporarily raise the tariff for certain farm products (specified in the Uruguay Round Agreement on Agriculture) to above the permitted bound level. For example, the European Union and the United States are two important importing countries in the world sugar market, and both heavily protect their domestic sugar industries and have recourse to the special safeguard for sugar. Australian agricultural exporters may not be ensured improved market access through tariff quota expansion if key protectionist countries use tariff quota administration to control the competition that domestic industry faces from imports. The ability of a government to influence imports through administrative arrange212

australian commodities > vol. 13 no. 1 > march quarter 2006

Doha Round Box 3: Some key markets with distortions, and competitors for Australian exports Key markets

Key policies restricting trade

Key competitors

Key policies of competitors

Japan

> High tariffs, tariff quota and special safeguards > Domestic support

Canada

> Domestic support

European Union

> Domestic support > Export subsidies

United States

> Domestic support

Crops Wheat

Sugar

Cotton

Rice

Japan

> High tariffs > Domestic support

Brazil

> Domestic support

United States

> High tariffs, tariff quota and special safeguards > Domestic support

European Union

> Domestic support > Export subsidies

Thailand

Indonesia

> Moderate tariffs

European Union

> Domestic support

Korea

> Low tariffs

United States

> Domestic support

Thailand

> Low tariffs

Japan

> High tariffs, tariff quota and special safeguards > Domestic support

Thailand

> Domestic support

Korea

> Quota (in-quota tariff only) > Domestic support

United States

> Domestic support

Chinese Taipei

> High tariffs, tariff quota and special safeguards

Livestock and dairy Beef

Japan

> High tariffs with a snapback tariff mechanism

United States

Korea

> High tariffs

Uruguay

United States

> Moderate tariffs, tariff quota and special safeguards

Sheep meat

European Union

> High tariffs, tariff quota and special safeguards

New Zealand

Cheese

European Union

> High tariffs, tariff quota and special safeguards > Domestic support

European Union

Japan

> Moderate tariffs

New Zealand

Korea

> Moderate tariffs

United States

> High tariffs and tariff quota

Japan

> High tariffs, tariff quota and special safeguards

European Union

Korea

> High tariffs and tariff quota > Domestic support

New Zealand

Milk powders

> Domestic support > Export subsidies

> Domestic support > Export subsidies

Source: Based on WTO (2006).

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Doha Round ments, import standards and government controls tends to restrict the extent to which a tariff quota can be filled.

Cuts in domestic farm support The nature and extent of cuts in domestic support in key countries that provide significant levels of domestic farm support will have a key influence on the actual gains from farm policy reform. Some major developed countries, especially the United States, the European Union and some in north Asia, can fund support policies for their agricultural sectors because they are easily able to draw from considerable amounts of taxpayers’ funds. As such, overall trade distorting domestic support (which adds up amber box, blue box and de minimis support) and in some cases export subsidies are significant means of providing agricultural assistance in these countries. The major countries that provide significant levels of Domestic support and WTO ‘boxes’ domestic farm support have shown a willingness to change mechanisms for providing support. They have shifted trade Green box distorting domestic support from the amber box, where the Domestic support is categorised as ‘green box’ if it is support is subject to limitations, to the blue and green boxes, considered to be minimally trade distorting. Categowhere support is not currently limited, but is considered ries of such support include government services and less trade distorting than the amber box. But they have not infrastructure, decoupled income support payments, been prepared to substantially reduce overall levels of farm disaster relief payments, investment aids and environmental and regional payments. These payments support. Shifting support can open up the gap between are exempt from any reduction commitments or limithe permitted levels of distorting domestic support that are tations. subject to agreed limits and levels actually used. This means that agreed cuts would need to be large enough, not only to Blue box eliminate the gap created but also to reduce actual levels of Under the Uruguay Round Agreement on Agriculture, ‘blue box’ support refers to direct payments that distorting support. Under such conditions, gains from trade would normally be classified as trade distorting but will also depend on the extent to which the other various that are provided under production limiting arrangeforms of exempt domestic support are less distorting. ments, such as area reduction programs or payments based on a fixed number of animals. Blue box support is currently exempt from reduction commitments or limitations.

Amber box ‘Amber box’ support is acknowledged to be market distorting. The main components of amber box support are market price support and nonexempt government payments. Amber box support was subject to reduction commitments under the Uruguay Round Agreement on Agriculture.

De minimis In the Uruguay Round agriculture negotiations, de minimis provisions were designed to allow members to maintain low levels of market distorting support. Under de minimis provisions, two forms of de minimis payments apply. One is for commodity specific support if it is less than a specified percentage of the value of production of the commodity. The other is non commodity specific support if it is below a specified percentage of the total value of agricultural production. Source: Nair et al. 2005

214

Timing of support cuts The sequencing and timing of the reduction in domestic support and improvement in market access could also have a bearing on the overall benefits to Australian farmers. For example, appreciable reduction in market access barriers at an early stage of any reform implementation process is likely to have favorable trade effects beginning to flow through in the near term. On the other hand, farmers in key countries that provide significant levels of domestic farm support will take a longer period of time to respond to any agreed phasing out or reduction of domestic support. Hence, in such circumstances, the flow-on favorable trade effects are likely to take longer to materialise.

Potential as export markets It is important to recognise that not all markets will offer the same potential for additional exports of Australian agricultural products. Markets with a large proportion of world consumption and moderate to high tariffs, and markets with a small to moderate proportion of world consumption that australian commodities > vol. 13 no. 1 > march quarter 2006

Doha Round have very high tariffs and rely heavily on domestic production to meet internal consumption will offer increased scope for additional exports from improved market access through WTO based tariff reductions (Jacenko et al. 2005). In addition, new markets, particularly in developing countries, that are characterised by rising incomes and population growth will be sources of increased levels of demand for several key agricultural commodities.

Potential impacts of reform ABARE’s global trade and environment model (GTEM) has been used to provide an indication of the potential impact on Australian farmers of two illustrative trade reform scenarios. GTEM uses the latest GTAP 6 database and links all countries and regions, including Australia, through trade and investment. The model has a detailed representation of trade policies, making it a suitable tool to analyse the effects of reforming market access barriers, domestic support and export subsidies. Detailed information on GTEM is provided on ABARE’s web site (www.abareconomics.com). The two illustrative trade reform simulations analysed here include a ‘more market’ oriented case and a ‘less market’ oriented case (see box 4). The broad framework and the working hypothesis contained in the Hong Kong Ministerial Declaration (for example, on the bands

Box 4: Illustrative simulations – key elements Market access More market oriented simulation

Less market oriented simulation

Bound tariff cuts of 65%, 75%, 85% and 90% in 4 bands: 0–20, 20–40, 40–60 and 60→. (maximum cuts where bound tariffs are over 60%)

Bound tariff cuts of 20%, 30%, 35% and 40% in 4 bands: 0–30, 30–60, 60–90 and 90→. (maximum cuts where bound tariffs are over 90%)

Bound tariffs capped at 75% for developed countries and 100% for developing countries

No tariff caps for developed countries and developing countries

1% of total agricultural tariff lines nominated as ‘sensitive products’

8% of total agricultural tariff lines nominated as ‘sensitive products’

Reduction commitments by developed countries will be phased in over five years

Reduction commitments by developed countries will be phased in over five years

Tariff cuts for developing countries will be two-thirds of the cuts required by developed countries. Reduction commitments by developing countries will be phased in over ten years

Tariff cuts for developing countries will be two-thirds of the cuts required by developed countries. Reduction commitments by developing countries will be phased in over ten years

Domestic support More market oriented simulation

Less market oriented simulation

Cuts to overall trade distorting domestic support of 80% in the first band, 75% in the second band and 70% in the third band

Cuts to overall trade distorting domestic support of 70% in the first band, 50% in the second band and 30% in the third band

Export subsidies More market oriented simulation

Less market oriented simulation

Eliminate export subsidies by 2013

Eliminate export subsidies by 2013

Note: The two simulations respectively model the more and less market oriented components of the current negotiating proposals and do not necessarily reflect any individual negotiating proposals.

australian commodities > vol. 13 no. 1 > march quarter 2006

215

Doha Round and tiers for structuring cuts to tariffs and distorting domestic support) are taken into account in formulating the two illustrative simulations. The more market oriented simulation includes the more reform oriented elements of the negotiating proposals that are currently being considered. Conversely, the less market oriented simulation includes the less reform oriented elements of the negotiating proposals that are currently on the table. It is important to recognise that the illustrative simulations undertaken here contain only the key aspects of the range of negotiating proposals that have been put on the table since October 2005. The key elements of these two illustrative simulations are provided below, with details given in box 4. In both simulations, the reform elements are implemented from 2007 onwards and phased in over five years among the developed counties and over ten years among the developing countries. The simulation results are reported for 2011 as the differences from the reference case, where no reform is assumed.

More market oriented case Market access

In this simulation, higher bound tariffs were subject to deeper cuts, facilitated through a ‘tiered formula’. For developed countries, the cap for new bound tariffs is 75 per cent. It was assumed for this analysis that bound tariff cuts for developing countries were equal to two-thirds of those for developed countries. A tariff cap for developing countries ensures that no new bound tariffs are higher than 100 per cent. Domestic support

The domestic support cuts in this simulation refer to overall cuts to total trade distorting domestic support, which is defined to include AMS, de minimis and blue box support. Cuts to individual elements of distorting support such as AMS, blue box support and de minimis support have not been modeled here. In this scenario, overall trade distorting domestic support in the European Union is reduced by 80 per cent, in both the United States and Japan by 75 per cent and in Korea by 70 per cent.

Less market oriented case Market access

For this simulation, higher bound tariffs were subject to lower linear cuts and new bound tariffs for developed and developing countries were not capped. It was also assumed for this analysis that bound tariff cuts for developing countries were equal to two-thirds of those for developed countries. Domestic support

The domestic support cuts in this simulation also refer to overall cuts to trade distorting domestic support. Cuts to individual elements of distorting support such as AMS, blue box and de minimis have not been modeled here. In this scenario, overall trade distorting domestic support in the European Union is reduced by 70 per cent, in both the United States and Japan by 50 per cent and in Korea by 30 per cent.

Simulation results The impacts of agricultural reforms under the two simulations on global trade and trade in the United States, the European Union and China are shown in figure A. The more market oriented 216

australian commodities > vol. 13 no. 1 > march quarter 2006

Doha Round simulation generates a greater increase in trade than the less market oriented simulation, increasing the value of world agricultural exports (fob) by an estimated US$30 billion and US$6 billion in 2011 (relative to the reference case) respectively (in 2005 dollars). As can be seen in figure A, the more market oriented simulation generates a greater increase in trade for the United States, the European Union and China than the less market oriented simulation. Under the more market oriented simulation, US agricultural exports (fob), relative to the reference case, are estimated to increase by US$7 billion (in 2005 dollars) in 2011. Under the less market oriented simulation, US agricultural exports expand by substantially less, at around US$2 billion (in 2005 dollars) in 2011. Exports of commodities such as beef and fruits and vegetables account for a substantial share of the increase in trade under the more market oriented simulation, but form a much smaller share of the increase in exports under the less market oriented simulation. In the case of EU imports (cif), commodities such as sugar, dairy and other livestock products account for a greater share of the increase in trade under the more market oriented simulation. (These findings are consistent with the analysis undertaken by FAPRI (2005) using the FAPRI partial equilibrium model.) In the case of China, rapidly rising incomes are continuing to generate increasing import demand for certain agricultural commodities. Agricultural trade reforms are likely to contribute further to the increasing imports (cif) as shown in figure A. The impacts on major Australian agricultural exports under Increase in agricultural trade in 2011 each simulation are shown in figure B. Under the more market relative to the reference case oriented simulation, the value of major Australian agricultural exports is estimated to increase by 15 per cent in 2011, More market oriented relative to the reference case. Exports of beef, dairy products, 25 Less market oriented sugar and wheat account for the increase in trade under the 20 more market oriented simulation. Beef exports are estimated to increase by 12 per cent in 2011. Exports of dairy products 15 expand by an estimated 14 per cent in 2011. Sugar exports are estimated to expand by 21 per cent in 2011. Exports of 10 wheat increase by an estimated 10 per cent in 2011. These 5 estimated export increases are relative to the reference case. 2005 Under the less market oriented simulation, the major Austra- US$b lian agricultural exports (relative to the reference case) are United European China World States Union estimated to expand by substantially less than under the more market oriented simulation, at 3 per cent in 2011. Under the less market oriented simulation, beef exports are estimated Increase in the value of Australian to increase by 1 per cent in 2011, dairy products by 3 per agricultural exports in 2011 relative to the reference case cent, sugar by 1 per cent and wheat by 5 per cent. These estimated export increases are relative to the reference case. More market oriented The impacts on Australian agricultural producer gross 20 Less market oriented income under both simulations are shown in figure C. While the Australian agricultural sector expands under both simulations, the impacts are substantially larger under the more 15 market oriented simulation. Under this simulation the Australian agricultural sector (including beef, dairy products, wheat and 10 sugar) as a whole gains from the assumed domestic support 5 and market access reforms, with the producer gross income in the farm sector being 8 per cent larger in 2011, rela% tive to the reference case. Under this simulation, most of the Beef Dairy Sugar Wheat Total expansion would occur in the beef, dairy products and sugar

A

B

australian commodities > vol. 13 no. 1 > march quarter 2006

217

Doha Round

C 10 8 6 4 2 %

industries which benefit from improved market access and domestic support cuts in key countries that pursue distorting farm policies. Relative to the reference case, gross income for relative to the reference case beef is estimated to be 8 per cent higher in 2011, for dairy More market oriented products 6 per cent, for sugar 12 per cent and for wheat 9 Less market oriented per cent higher than in 2011. Under the less market oriented simulation, expansion in the gross income of Australian agricultural producers is much lower, as expected, at an estimated 2 per cent in 2011, relative to the reference case. For the industries analysed, the increases are much lower than under the more market oriented simulation — beef 1 per cent in 2011, dairy products 2 per cent, sugar 1 per cent and wheat 4 per cent in 2011. As indicated earlier, it is important to recognise that the analysis presented here is illustrative and the potential effects Beef Dairy Sugar Wheat Total estimated under both simulations provide only a broad indication of the probable impacts. Some complex and unresolved issues that might undermine the benefits of reform outlined earlier in this article have not been factored into the simulations. Current understanding of the issues, including special safeguard measures, tariff quota administration and the treatment of sensitive products, indicate that these issues are complex, open ended and yet to be resolved, hence the ability to comprehensively analyse them is constrained. Further clarity on these issues and the progress expected to be made in the negotiations over the coming months would help to enhance the ability to provide improved assessments of the potential effects of the negotiating proposals under the Doha Round of WTO agricultural trade negotiations.

Increase in Australian agricultural producer gross incomes in 2011

Concluding remarks Achieving a successful outcome in the WTO Doha Round of agricultural trade negotiations would potentially have considerable benefits for Australia’s farm sector. In order to obtain a successful outcome, key countries that pursue distorting farm policies must aim high in the negotiations and agree to substantial and meaningful reductions in market access barriers and distorting domestic support. In this regard, one important WTO member, namely the United States, has a unique opportunity to shape a new farm bill that improves the overall welfare of its farm sector and generates gains for others. For other key countries that pursue distorting farm policies, farm policy reforms are likely to generate economywide gains. Sizable reductions in tariffs on key farm products in major markets would create opportunities for enhanced world agricultural trade and increased exports from Australia. Cuts to distorting domestic farm support need to be genuine and must reduce the scope that presently exists for subsidising countries to restructure and shift farm support into other WTO boxes without actually reducing the overall distorting effect. The rules for world trade that are expected to be agreed at the close of the Doha Round will affect world agriculture for many years to come. Therefore it is important that any possible outcome in the agricultural trade negotiations reduces domestic support and improves market access conditions.

218

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Doha Round

References European Commission 2005, ‘Making Hong Kong a success: Europe’s contribution’, Brussels (http://europa.eu.int/comm/trade/issues/newround/doha_da/offerdda_en.pdf). FAPRI (Food and Agricultural Policy Research Institute) 2005, US Proposal for WTO Agriculture Negotiations: Its Impact on US and World Agriculture, CARD Working Paper 05-WP 417, Iowa, December. ICTSD (International Centre for Trade and Sustainable Development) 2005, ‘G20 proposal on market access’, 12 October (www.agtradepolicy.org/output/resource/G20MarketaccessproposalOct05.pdf). Jacenko A., Podbury, T., Shaw, I., Nair, R. and Gunasekera, D. 2005, ‘Agricultural trade – improving market access through the WTO’, Australian Commodities, vol. 12, no. 3, September quarter, pp. 549–58. Nair, R., Chester, C., McDonald, D., Podbury, T., Gunasekera, D. and Fisher, B.S. 2005, Timing of the US Farm Bill and WTO Negotiations – A Unique Opportunity, ABARE eReport 05.11, Canberra, November. Podbury, T., Shaw, I., Nair, R., Jacenko, A., Gunasekera, D. and Fisher, B.S. 2005, Reducing barriers to farm trade, ABARE conference paper 05.18 presented at the Victorian Regional Outlook Conference, Ballarat, 20 July. Tangerman, S. 2005, Organisation for Economic Co-operation and Development area agricultural policies and the interests of developing countries, OECD paper presented as the Waugh Memorial Lecture at the Annual Meeting of the American Agricultural Economics Association, Rhode Island, July. Tyers, R. and Anderson, K. 1992, Disarray in World Food Markets: A Quantitative Assessment, Cambridge University Press, Massachusetts. USTR (Office of the United States Trade Representative) 2005, ‘U.S. Proposal for WTO agriculture negotiations’, Washington DC (www.ustr.gov/Trade_Sectors/Agriculture/ US_Proposal_for_WTO_Agriculture_Negotiations.html). WTO (World Trade Organisation) 2005, Doha Work Programme, Decisions adopted by the General Council on 18 December 2005, WT/MIN(05)/DEC, Geneva, 22 December. —— 2006, PC Integrated Data Base (IDB) and Consolidated Tariff Schedules Database (CTS), Brussels.

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219

australian commodities statistical tables

GDP, imports Contribution to GDP, Australia 1994-95

2004-05

$745.1b

$830.4b

Agriculture, forestry and fishing 3% Mining 5%

Agriculture, forestry and fishing 3% Mining 4% Manufacturing 11%

Manufacturing 13%

Building and construction 6%

Building and construction 6%

Services 76%

Services 74%

Share of Australian imports, by source In 2004-05 dollars

2004-05

1994-95 $96.1b

Total

$149.5b United States 22%

Other 36%

United States 14% Other 43%

Japan 11%

Japan 17% China 13% New Zealand 5% China 5% Germany 7% Singapore 3% United Kingdom 6%

Agriculture

New Zealand 4% Singapore 5%

$4.7b

$6.8b China 5%

China 2% ASEAN 16%

Other 19%

Germany 6% United Kingdom 4%

Other Asia 7%

Other 17%

ASEAN 15%

United States

Other Asia 4%

11%

United States 15% Europe 25%

Europe 30%

New Zealand 18%

New Zealand 15%

Minerals and energy

Other 40%

$7.9b

$20.9b

Indonesia 7% Malaysia 1% Singapore 5% Viet Nam 3% Other Asia 11%

Other 21%

Indonesia 8% Malaysia 10%

New Zealand 3% Singapore 21% Middle East 10%

New Zealand 8%

222

Middle East 25%

Other Asia15%

australian commodities

Viet Nam 12%

> vol. 13 no. 1 > march quarter 2006

export markets Markets for Australian exports

In 2004-05 dollars

2004-05

1994-95 $86.5b

Total

$126.5b

China 4% Other 37%

China 10%

Japan 24%

Other 32%

Korea, Rep. of 8%

Agriculture

Korea, Rep. of 8%

Europe 11%

United States 7% New Zealand 7%

Europe 11% India 2%

Japan 20%

India 5%

$23.0b

$27.7b

China 8%

Other 16%

United States 7% New Zealand 7%

United States 7%

Japan 23%

Middle East 4%

China 10%

Other 15%

Japan 19%

United States 11% Middle East 7%

Europe 12% Other Asia 14%

Energy

$14.7b

$29.7b

Other 17%

Other 17%

Japan 45%

Japan 39%

Europe 9%

Europe 10% Other Asia 9% India 5% Chinese Taipei 6%

Minerals

ASEAN 15%

Europe 10% Other Asia 13%

ASEAN 5%

Other Asia 12% India 6% Chinese Taipei 6%

Korea, Republic of 9%

$25.2b

Korea, Republic of 12%

$38.6b

China 3% Other 26%

China 17% Other 24%

Japan 23%

Japan 16% Europe 6%

Korea, Rep. of 12% Thailand 4% India 1%

Other Asia 25%

Manufacturing Other 23%

Europe 7% Other Asia 12% India 10%

$20.6b

Korea, Rep. of 8% Thailand 5%

$26.8b

China 4% Japan 10%

Other 24%

Korea, Rep. of 5%

China 9% Japan 2% Korea, Rep. of 5%

New Zealand 23%

United States 17%

New Zealand 23%

United States 17% Europe 19% australian commodities > vol. 13 no. 1 > march quarter 2006

Europe 20% 223

agriculture Principal markets for Australian agricultural exports Wheat

Barley

Egypt

Kuwait 2004-05

Japan

United Arab Emirates

1994-95 Korea,Rep of

Iran

Iraq

China

China

Japan

Indonesia

Saudi Arabia kt

500

1000

1500

2000 2500

Sugar

2004-05 1994-95

kt

500

1000 1500

2000 2500

Wine Sweden

New Zealand

2004-05

Indonesia Canada

Germany

Japan

Canada

Malaysia

United States

Korea,Rep of

United Kingdom kt

200

400

600

800

2004-05

New Zealand

1994-95

1000

1994-95

ML

50

100

150

200

250

Sheep meat

Beef and veal

Mexico

Canada Chinese Taipei

2004-05

Papua New Guinea

2004-05

1994-95

Japan

1994-95

Korea, Rep. of

European Union Japan

Saudi Arabia

United States

United States kt

100

200

300

400

Wool

10

20

30

40

50

Cheese Indonesia

Germany

Korea, Republic of

France

2004-05

Chinese Taipei India

Netherlands

Italy

Saudi Arabia

China

Japan 50

100

150

200

2004-05

United States

1994-95

kt 224

kt

250

1994-95

kt australian commodities

20

40

60

80

100

> vol. 13 no. 1 > march quarter 2006

minerals and energy Principal markets for Australian mineral and energy exports Thermal coal

Metallurgical coal United Kingdom

India 2004-05

China

2004-05

Netherlands

1994-95

Malaysia

Chinese Taipei

Chinese Taipei

Korea, Rep of

1994-95

India

Korea, Rep of

Japan

Japan A$m

1000

2000

3000

A$m 500 1000 1500 2000 2500 3000 3500

Oil and gas

Gold

Indonesia

Japan

2004-05

United States

Singapore

1994-95

New Zealand

Korea, Rep. of

Singapore

United Kingdom

Korea, Rep. of

Thailand

Japan

India

A$m

1000

2000

3000

4000

5000

A$m

2004-05 1994-95

500

1000

1500

2000

2500

Aluminium

Iron ore

United States

France United Kingdom Chinese Taipei Korea, Rep of

2004-05

Hong Kong

1994-95

Thailand

2004-05 1994-95

Chinese Taipei Korea, Rep of

Japan

Japan

China A$m

1000

2000

3000

4000

Copper

A$m

200

400

600

800

1000 1200

Iron and steel

Korea, Rep of

Malaysia

2004-05

Indonesia

2004-05

Chinese Taipei India

New Zealand

1994-95

China

China

Japan

United States

Malaysia

1994-95

Korea, Rep of

A$m

100

200

300

400

500

600

australian commodities > vol. 13 no. 1 > march quarter 2006

A$m

100

200

300

400 225

prices

1

Indexes of prices received by farmers

Crops sector Grains Winter crops Barley Canola Lupins Oats Wheat Summer crops Sorghum

2000-01

2001-02

2002-03

2003-04

2004-05

125.1 79.6 104.9 96.5 117.4

130.8 99.7 127.7 128.2 132.3

159.9 100.9 149.0 160.3 134.4

105.9 104.4 120.4 101.1 109.1

101.0 84.9 103.2 92.7 96.6

2005-06 s

2006-07 f

102.3 84.0 103.2 122.8 111.4

107.6 87.4 101.1 122.5 124.3

85.1

102.2

120.9

93.8

88.7

99.5

102.7

Total grains a

108.7

123.7

134.0

105.2

95.1

104.9

113.3

Cotton Sugar Hay Fruit Vegetables

106.1 70.4 110.7 102.0 107.5

92.7 88.5 104.2 117.8 104.3

100.1 83.2 155.0 108.9 123.8

88.2 76.3 125.0 123.9 124.6

87.0 83.1 128.0 114.3 122.2

80.1 94.8 125.5 115.6 124.9

67.4 115.3 123.0 119.9 117.9

Total crops sector

104.7

113.6

118.7

106.3

99.3

104.0

107.9

144.2 104.1 117.9 111.4 113.7 90.1

167.7 167.2 204.7 156.1 123.6 93.0

145.0 176.7 185.4 179.3 109.7 98.5

160.4 190.1 230.3 178.0 109.4 97.7

174.2 184.1 196.1 164.1 120.3 101.6

167.8 186.9 200.4 176.6 114.1 104.7

146.7 186.3 199.3 175.5 111.7 107.2

126.0

151.5

139.1

149.2

157.4

154.9

143.4

98.3 97.0 79.1

113.9 110.5 82.8

153.2 90.7 92.4

116.5 93.4 89.2

106.2 103.9 85.4

109.5 110.9 81.2

104.9 110.9 89.1

Livestock sector Livestock for slaughter Cattle Lambs b Sheep Live sheep for export Pigs Poultry Total Livestock products Wool Milk Eggs Total

95.6

109.0

114.0

101.6

103.2

107.8

106.8

Store and breeding stock

126.0

145.3

125.9

144.0

156.9

154.3

138.9

Total livestock sector

113.0

133.4

128.1

129.3

134.9

135.1

127.9

Total prices received

108.5

122.5

122.6

116.5

115.0

117.8

116.8

a Total for the group includes commodities not separately listed. b Lamb saleyard indicator weight 18–20 kilograms. s ABARE estimate. f ABARE forecast. Note: 1 ABARE revised the method for calculating these indexes in October 1999. The indexes for commodity groups are calculated on a chained weight basis using Fisher's ideal index with a reference year of 1997-98 = 100. Indexes for most individual commodities are based on annual gross unit value of production. 2 Prices used in these calculations exclude GST. Source: ABARE.

226

australian commodities

> vol. 13 no. 1 > march quarter 2006

prices

2

Indexes of prices paid by farmers, and terms of trade

Farmers’ terms of trade a Materials and services Seed, fodder and livestock Fodder and feedstuffs Seed, seedlings and plants Store and breeding stock Total

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

98.6

108.6

101.2

94.8

90.5

90.9

88.4

93.6 105.2 126.0

105.5 112.9 145.3

167.5 118.3 125.9

148.3 104.9 144.0

147.2 95.4 156.9

132.5 90.6 154.3

140.3 95.4 138.9

102.7

116.1

149.8

141.5

143.4

133.1

133.6

Chemicals Electricity Fertiliser Fuel and lubricants

103.3 99.9 106.4 137.6

105.6 100.4 104.3 122.9

108.0 100.5 104.5 121.7

110.0 100.0 103.6 138.6

111.9 101.3 103.6 168.4

114.5 103.3 106.2 198.7

116.6 104.9 108.8 196.1

Total

109.0

112.9

125.4

125.1

129.6

130.4

132.0

Labor

110.1

113.3

117.9

121.6

125.7

129.5

132.7

Marketing

109.3

112.4

115.9

118.7

121.5

125.2

128.3

Overheads Insurance Interest paid Rates and taxes Other overheads

109.8 111.2 112.4 108.7

118.6 104.2 115.5 111.9

124.5 110.7 119.1 115.4

128.8 118.1 121.9 118.1

131.9 123.7 124.8 121.0

135.1 130.3 128.6 124.6

139.2 133.6 131.8 127.7

Total

111.3

109.9

115.2

120.6

125.0

130.2

133.5

Capital items

111.9

115.2

118.3

121.3

124.4

128.2

131.7

Total prices paid

110.0

112.8

121.2

123.0

127.1

129.6

132.1

Excluding capital items Excluding capital and overheads Excluding seed, fodder and store and breeding stock

109.6 109.2

112.3 112.9

121.4 122.8

123.1 123.6

127.3 127.8

129.6 129.5

132.0 131.6

111.3

112.0

115.3

119.2

123.7

128.9

131.7

a Ratio of index of prices received by farmers and index of prices paid by farmers. s ABARE estimate. f ABARE forecast. Note: 1 ABARE revised the method for calculating these indexes in October 1999. The indexes for commodity groups are calculated on a chained weight basis using Fisher's ideal index with a reference year of 1997-98 = 100. 2 Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

227

costs and returns

3

Farm costs and returns

Unit

Costs Materials and services Chemicals Fertiliser Fuel and lubricants Marketing Repairs and maintenance Seed and fodder Other

2001-02

$m $m $m $m $m $m $m

Total

1 1 1 3 2 3 3

2002-03

760 980 580 395 328 226 339

1 1 1 2 2 4 3

550 820 520 433 392 874 329

2003-04

1 1 1 3 2 4 3

2004-05

649 827 626 567 453 317 378

1 1 1 3 2 4 3

2005-06 s

691 851 765 441 462 245 473

1 1 2 3 2 3 3

2006-07 f

746 913 083 702 599 840 691

1 1 2 3 2 3 3

797 974 055 770 671 474 804

$m

17 608

17 918

18 817

18 928

19 574

19 545

$m

3 367

3 226

3 588

3 661

3 771

3 865

$m $m $m

2 087 400 5 854

2 295 412 5 933

2 448 422 6 458

2 579 432 6 672

2 716 445 6 932

2 798 456 7 119

Total cash costs

$m

23 463

23 851

25 275

25 601

26 506

26 664

Depreciation a Total farm costs

$m

3 796

3 915

4 017

4 122

4 249

4 362

$m

27 258

27 766

29 292

29 722

30 755

31 027

$m $m

39 485 39 815

32 488 34 538

36 815 37 437

35 361 36 555

37 154 36 704

37 018 36 568

$m

12 227

4 722

7 523

5 639

6 399

5 991

$m $m $m $m

13 16 18 24

Labor Overheads Interest paid Rent and third party insurance Total

Returns Gross value of farm production Gross farm cash income b Net returns and production Net value of farm production c Real net value of farm production d Net farm cash income e Real net farm cash income d Gross value added g

607 353 198 396

5 10 11 18

097 687 537 128

7 12 12 24

935 162 828 365

5 10 11 22

805 955 279 769

6 10 10 23

399 198 198 232

5 9 9 23

845 904 662 576

a Based on estimated movements in capital expenditure and prices of capital inputs. b Gross value of farm production less increase in farmers’ assets held by marketing organisations. c Gross value of farm production less total farm costs. d In 2005-06 Australian dollars. e Gross farm cash income less total cash costs. g Chain volume measures at basic prices. Reference year is 2003-04. s ABARE estimate. f ABARE forecast. Note: Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

4

Australian unit export returns

Annual indexes

a

Farm Energy minerals Metals and other minerals Total mineral resources Total commodities

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

108.3 141.0 115.6

117.8 140.8 110.3

116.0 135.2 105.9

107.1 120.2 105.1

106.0 166.1 125.1

107.5 225.4 153.5

105.7 212.5 160.2

125.4

122.2

117.4

111.1

141.0

181.3

180.6

120.6

121.5

117.5

110.3

130.3

158.2

157.2

2005-06

2004-05

Quarterly indexes

b

Farm Energy minerals Metals and other minerals Total mineral resources Total commodities

Mar. p

2006-07 f

2006-07

June

Sep.

Dec.

104.1 210.1 151.3

109.7 231.4 157.2

111.7 239.9 159.8

107.5 251.2 171.9

101.4 233.6 175.9

June s

108.1 231.5 176.6

Sep. f

104.5 227.1 174.9

Dec. f

106.1 229.9 173.9

Mar. f

104.2 213.1 168.4

June f

174.5

186.4

191.3

203.2

198.9

198.5

195.7

196.2

186.3

149.7

159.2

163.1

169.3

164.7

166.7

163.7

164.4

157.3

a In Australian dollars. Base: 1989-90 = 100. b In Australian dollars. Base: 1994-95 = 100. p Preliminary. s ABARE estimate. f ABARE forecast. Source: ABARE.

228

australian commodities

> vol. 13 no. 1 > march quarter 2006

exports

5

Contribution to exports by sector Balance of payments basis

Proportion of merchandise exports 2000-01

Rural 27%

Proportion of exports of goods and services

a

Other merchandise 22% Services 22%

Other merchandise 25%

Mineral resources 47%

Rural 21%

Mineral resources 35%

a

2001-02 Rural 28% Other merchandise 25%

2002-03

Mineral resources 36%

Services 21% Mineral resources 46%

Rural 26%

Rural 20%

a

Other merchandise 27%

2003-04

Other merchandise 22%

a

a

Other merchandise 21% Services 22% Mineral resources 47%

Rural 20%

Rural a 26%

Mineral resources 37%

a

Other merchandise 20% Mineral resources 36%

Other merchandise 26%

Services 24% Mineral resources 48%

Rural 20%

a

2004-05 Rural 24% Other merchandise 23%

a

a

Other merchandise 18% Services 22% Mineral resources 53%

Rural 19%

Mineral resources 41%

a

Includes farm, forest and fisheries products. Source: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

229

exports

6

Annual exports summary Balance of payments basis

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

2005-06 s $m

2006-07 f $m

At current prices Rural Cereal grains and products Sugar and honey Meat and meat preparations Wool and sheepskins Other rural a Total Mineral resources Coal, coke and briquettes Other mineral fuels Metalliferous ores and other minerals bs Gold Other metals cs Total s Total commodities sector s Other merchandise s Total merchandise s Services Total goods and services

6 1 6 3 16

481 610 246 687 340

4 1 5 3 14

487 363 655 545 901

5 1 5 2 14

094 123 758 778 105

5 1 6 2 14

159 395 938 838 106

4 2 6 2 14

883 188 109 642 544

5 2 6 2 15

992 466 578 579 084

34 364

29 951

28 858

30 436

30 366

32 700

13 430 10 940

11 987 11 049

11 001 8 766

17 236 11 151

25 299 15 672

24 109 17 101

15 286 5 300 10 991

15 312 5 718 10 941

15 419 5 839 11 322

20 476 5 758 13 077

29 924 6 975 14 053

35 799 8 214 14 272

55 947

55 007

52 347

67 698

91 923

99 494

90 310

84 958

81 204

98 134

122 289

132 194 na

30 640

30 842

28 300

29 476

na

120 950

115 800

109 504

127 610

na

na

33 828

33 891

35 172

36 518

na

na

154 778

149 691

144 676

164 128

na

na

Chain volume measures d Rural Cereal grains and products Sugar and honey Meat and meat preparations Wool and sheepskins Other rural a Total Mineral resources Coal, coke and briquettes Other mineral fuels Metalliferous ores and other minerals bs Gold Other metals cs Total s Total commodities sector s Other merchandise s Total merchandise s Services Total goods and services

5 1 5 3 16

520 058 942 416 471

3 1 6 2 14

754 123 010 735 153

5 1 5 2 14

094 123 758 778 105

5 1 6 3 12

504 127 405 161 357

5 1 6 3 14

133 133 281 180 700

6 1 6 3 15

217 164 514 310 675

32 407

27 775

28 858

28 554

30 426

32 880

9 970 10 818

10 438 10 129

11 001 8 765

11 649 8 879

12 208 9 758

12 795 11 237

13 983 5 248 11 482

14 881 5 485 11 808

15 420 5 838 11 323

16 763 5 624 10 096

20 075 6 096 10 327

23 141 6 501 10 843

51 501

52 740

52 347

53 011

58 464

64 518

83 908

80 516

81 204

81 565

88 890

97 397

24 542

27 638

28 300

31 350

na

na

108 450

108 154

109 504

112 915

na

na

35 385

34 505

35 171

35 438

na

na

143 764

142 675

144 676

148 352

na

na

a Includes other farm, forest and fisheries products. Includes exports of wine and of paper and paperboard, which are not included in this balance of payments item by the ABS. b Includes diamonds, which are not included in this balance of payments item by the ABS. c Includes ABARE estimates for steel and nickel which were confidentialised by the ABS. d For a description of chain volume measures, see ABS, Introduction of chain volume measures, in the Australian National Accounts, cat. no. 5248.0, Canberra. Reference year is 2003-04. s ABARE estimate. f ABARE forecast. na Not available. Sources: ABS, Balance of Payments, Australia, cat. no. 5302.0, Canberra; ABARE.

230

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exports

7

Quarterly exports summary Balance of payments basis

2004-05

2005-06

2006-07

June

Sep.

Dec.

Mar. p

June s

Sep. f

Dec. f

Mar. f

June f

$m

$m

$m

$m

$m

$m

$m

$m

$m

981

1 017

1 048

1 385

1 433

1 275

1 492

1 635

1 590

428

885

669

326

308

998

754

367

347

1 889 749 3 616

1 676 580 3 840

1 686 730 3 617

1 414 601 3 290

1 333 731 3 797

1 687 633 4 020

1 692 706 3 672

1 467 560 3 445

1 732 681 3 946

7 663

7 998

7 750

7 016

7 601

8 612

8 317

7 475

8 297

5 695 2 959

6 116 3 518

6 255 3 334

6 804 4 402

6 124 4 417

6 091 3 653

6 228 4 121

6 293 4 646

5 497 4 681

6 344 1 452 3 389

6 150 1 500 3 178

7 303 1 600 3 440

7 924 1 910 3 739

8 547 1 965 3 697

8 692 1 918 3 578

8 819 1 979 3 540

9 281 2 123 3 604

9 007 2 194 3 550

At current prices Rural Cereal grains and products Sugar and honey Meat and meat preparations Wool and sheepskins Other rural a Total Mineral resources Coal, coke and briquettes Other mineral fuels Metalliferous ores and other minerals bs Gold Other metals cs Total s Total commodities sector s Other merchandise s Total merchandise Services Total goods and services

19 838

20 463

21 932

24 779

24 749

23 932

24 687

25 947

24 929

27 501 7 948

28 461 7 720

29 682 na

31 795 na

32 350 na

32 544 na

33 003 na

33 422 na

33 225 na

35 449 8 909

36 181 9 330

na na

na na

na na

na na

na na

na na

na na

44 358

45 511

na

na

na

na

na

na

na

1 053

1 112

1 088

1 436

1 497

1 362

1 553

1 669

1 633

234

448

349

166

170

466

355

169

173

1 745 875 3 331

1 561 672 3 770

1 553 843 3 589

1 464 746 3 265

1 702 918 4 075

1 671 773 4 075

1 675 870 3 851

1 453 745 4 028

1 716 922 3 722

7 238

7 564

7 423

7 078

8 362

8 346

8 305

8 063

8 166

3 027 2 247

2 963 2 374

2 894 2 201

3 158 2 567

3 192 2 616

3 139 2 632

3 212 2 661

3 222 2 950

3 222 2 994

4 389 1 442 2 543

4 107 1 435 2 509

5 271 1 508 2 652

5 310 1 562 2 579

5 388 1 591 2 588

5 543 1 331 2 645

5 667 1 671 2 694

5 941 1 742 2 740

5 990 1 757 2 765

Chain volume measures d Rural Cereal grains and products Sugar and honey Meat and meat preparations Wool and sheepskins Other rural a Total Mineral resources Coal, coke and briquettes Other mineral fuels Metalliferous ores and other minerals bs Gold Other metals cs Total s Total commodities sector s Other merchandise s Total merchandise Services Total goods and services

13 648

13 388

14 525

15 176

15 376

15 289

15 905

16 595

16 728

20 886 8 388

20 951 7 868

21 948 na

22 253 na

23 738 na

23 636 na

24 210 na

24 658 na

24 894 na

29 274 8 562

28 819 8 844

na na

na na

na na

na na

na na

na na

na na

37 835

37 663

na

na

na

na

na

na

na

a Includes other farm, forest and fisheries products. Includes exports of wine and of paper and paperboard, which are not included in this balance of payments item by the ABS. b Includes diamonds, which are not included in this balance of payments item by the ABS. c Includes ABARE estimates for steel and nickel which were confidentialised by the ABS. d For a description of chain volume measures, see ABS, Introduction of chain volume measures, in the Australian National Accounts, cat. no. 5248.0, Canberra. Reference year is 2003-04. p Preliminary. s ABARE estimate. f ABARE forecast. na Not available. Sources: ABS, Balance of Payments, Australia, cat. no. 5302.0, Canberra; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

231

sectors

8

Industry gross value added a

Unit

2000-01

2001-02

2002-03

2003-04

2004-05

Agriculture Forestry and fishing

$m $m

23 560 2 485

24 396 2 476

18 128 2 473

24 365 2 644

22 769 2 541

Total

$m

26 046

26 864

20 564

27 011

25 312

Mining (excludes services to mining) Services to mining

$m $m

32 114 3 537

32 044 3 637

31 734 3 882

30 713 3 652

31 742 4 293

Total

$m

35 663

35 688

35 609

34 366

36 035

$m $m $m $m $m $m $m $m $m

18 4 6 9 12 3 16 16 3

18 3 6 9 12 4 17 16 3

18 3 6 10 13 4 17 17 4

18 3 6 10 12 4 17 18 4

19 2 6 10 12 4 17 18 4

Agriculture, forestry and fishing

Mining

Manufacturing Food, beverage and tobacco Textile, clothing, footwear and leather Wood and paper products Printing, publishing and recorded media Petroleum, coal, chemical, etc. Non–metallic mineral products Metal products Machinery and equipment Other manufacturing Total

821 320 543 613 522 862 025 002 568

726 788 820 783 639 111 228 037 909

913 486 940 016 377 456 843 198 180

875 223 898 309 774 610 888 071 453

100 622 944 062 772 844 385 192 092

$m

90 877

92 808

96 277

97 103

96 011

Building and construction

$m

36 871

41 276

47 949

51 117

53 240

Electricity, gas and water supply Taxes less subsidies on products

$m $m

18 624 66 199

18 491 69 178

18 663 72 927

18 816 75 401

18 943 77 389

Statistical discrepancy

$m

0

0

0

0

– 264

Gross domestic product

$m

752 434

780 817

806 161

838 251

858 119

a Chain volume measures, reference year is 2003-04. Source: ABS, National Income, Expenditure and Product, cat. no. 5206.0, Canberra.

232

australian commodities

> vol. 13 no. 1 > march quarter 2006

production, employment

9

Volume of Australian production indexes

Farm Grains and oilseeds Total crops Livestock slaughterings Total livestock Total farm sector Forestry a Broadleaved Coniferous Total forestry Mine b Energy minerals Metals and other minerals Total minerals

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

130.1 121.7 108.0 107.6 115.2

59.3 83.4 109.8 104.2 93.6

138.6 123.0 104.4 99.6 111.9

115.4 114.9 109.2 103.0 109.7

133.2 120.8 108.1 102.7 112.4

128.9 119.8 110.6 104.5 112.8

107.8 127.0 118.0

119.6 136.2 128.5

112.2 133.5 123.5

115.6 125.3 121.0

125.1 121.5 123.6

146.9 121.5 134.1

115.2 111.7 113.7

112.5 115.8 114.1

107.5 115.7 111.5

109.9 124.4 117.1

113.6 130.0 121.8

117.6 144.2 130.7

a Volume of roundwood equivalent removed from forests. b Uranium is included with energy. s ABARE estimate. f ABARE forecast. Note: ABARE revised the method for calculating production indexes in October 1999. The indexes for the different groups of commodities are calculated on a chained weight basis using Fishers' ideal index with a reference year of 1997-98 = 100. Sources: Australian Bureau of Statistics; ABARE.

10

Employment a

Agriculture, forestry and fishing Agriculture Forestry and logging Commercial fishing Total (including services) Mining Coal Oil and gas extraction Metal ore Other mining (including services) Total Manufacturing Food, beverages and tobacco Textiles, clothing, footwear and leather Wood and paper product Printing, publishing and recorded media Petroleum, coal and chemical product Non–metallic mineral product Metal product Other manufacturing Total Other industries Total

1999-00 ’000

2000-01 ’000

2001-02 ’000

2002-03 ’000

2003-04 ’000

2004-05 p ’000

385 9 16

373 13 19

386 13 18

326 10 17

320 12 16

312 12 14

440

435

444

377

374

363

20 4 29 25

18 6 30 24

20 4 34 23

21 4 35 26

21 6 38 27

23 7 35 29

78

79

81

86

92

93

177 86 68 114 110 49 178 318

179 84 70 118 107 42 175 319

182 74 70 105 107 43 155 324

183 73 74 115 112 47 164 323

171 65 78 110 100 44 157 309

196 55 71 109 91 36 139 294

1 099

1 113

1 077

1 091

1 033

991

7 218

7 389

7 532

7 769

7 933

8 089

8 835

9 016

9 134

9 323

9 431

9 536

a Average employment over four quarters. p Preliminary. Source: ABS, The Labour Force, Australia, cat. no. 6291.0, Canberra.

australian commodities > vol. 13 no. 1 > march quarter 2006

233

business, banks

11

Business income

2000-01

2001-02

2002-03

2003-04

2004-05

$m

$m

$m

$m

$m

7 776

12 227

4 722

7 523

5 639

14 801

14 895

15 092

12 133

17 599

3 146 143 870

4 820 439 1 314

4 074 539 1 754

na na na

na na na

1 292 1 536 675 2 139 1 400 74

2 006 1 878 994 4 169 2 433 692

2 2 1 4 2

556 861 358 869 534 723

na na na na na na

na na na na na na

11 275

18 744

21 268

20 797

23 683

Other industries (including services)

18 726

27 895

40 289

50 922

57 459

Total (including services)

44 802

61 534

76 649

83 852

98 741

Farm Net value of farm production Company profits in selected industries a Mining Manufacturing Food, beverages and tobacco Textiles, clothing and footwear Wood and paper products Printing, publishing and recorded media Petroleum, coal and chemical product Non–metallic mineral product Metal product Machinery and equipment Other manufacturing Total

a Company profits before income tax. na Not available. Sources: ABS, National Income and Expenditure and Product, cat. no. 5206.0, Canberra; ABS, Company Profits, Australia, cat. no. 5651.0, Canberra; ABS, Business Indicators, cat. no. 5676.0, Canberra; ABS, Australian Industry , cat. no. 8155.0, Canberra; ABARE.

12

All banks lending to business a

2003-04

Agriculture, fishing and forestry Mining Manufacturing Construction Wholesale, retail trade, transport and storage Finance and insurance Other Total

2004-05

2005-06

Sep. $b

Dec. $b

Mar $b

June $b

Sep. $b

Dec. $b

Mar $b

June $b

Sep. $b

29.9 5.7 29.9 14.9

31.6 5.4 31.0 16.0

31.8 5.0 31.4 16.4

34.1 5.2 31.8 17.7

35.1 5.4 30.7 17.4

35.7 6.0 30.5 18.1

36.9 5.7 31.1 19.4

39.3 5.7 31.3 19.4

39.8 5.8 32.4 19.9

44.4 44.5 138.1

47.3 42.3 146.1

47.5 45.0 149.4

49.3 47.4 153.5

49.7 48.3 458.5

51.8 49.6 162.5

53.7 48.7 165.6

54.9 49.5 173.4

56.2 56.1 181.3

307.5

319.7

326.5

338.9

645.1

354.2

361.1

373.5

391.7

a Includes variable and fixed interest rate loans outstanding plus bank bills outstanding. Source: Reserve Bank of Australia, Bank Lending to Business - Selected Statistics, Bulletin Statistical Table D8.

234

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> vol. 13 no. 1 > march quarter 2006

farm debt

13

Rural indebtedness to financial institutions a

All banks a Other government agencies b Pastoral and other finance companies Other farm debt cs Total rural debt

1999-00 $m

2000-01 $m

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

23 240

25 174

26 829

28 957

34 115

39 481

663

701

711

739

763

837 3 112

2 527

2 639

2 691

1 628

3 379

1 901

1 920

1 967

2 017

2 067

na

28 331

30 434

32 198

33 341

40 324

na

a Derived from all banks lending to agriculture, fishing and forestry. b Includes the government agency business of state banks and advances made under War Service Land Settlement. Prior to 1996 includes loans from the Queensland Industry Development Corporation. From 1996 these loans are included in bank lending. c Includes loans from life insurance companies, lease agreements and indebtedness to hire purchase companies, trade creditors, private lenders and small financial institutions. s ABARE estimate. na Not available. Sources: Reserve Bank of Australia, Estimated Rural Debt to Specified Lenders, Bulletin Statistical Table D9; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

235

capital expenditure

14

Capital expenditure of private enterprises

2000-01 $m

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

145 361

161 937

184 803

199 356

215 535

5 491

7 250

8 766

9 282

10 253

2 206 256 632 735 1 466 543 1 254 1 855 197

2 205 213 593 687 1 284 554 1 541 1 854 251

2 614 230 709 553 1 608 965 2 158 2 180 367

2 274 200 912 538 2 090 590 2 689 1 877 257

2 418 268 711 558 2 423 711 3 390 1 875 328

9 144

9 181

11 385

11 423

12 681

42 621

44 380

50 815

51 247

57 554

148 891

164 669

186 668

199 356

211 071

New capital expenditure Mining Manufacturing Other selected industries

5 628 8 233 24 123

7 282 8 242 24 627

8 756 10 633 28 216

9 282 11 424 30 542

9 835 12 720 35 600

Total surveyed industries

38 189

40 167

47 596

51 247

58 153

At current prices Gross fixed capital formation a All sectors New capital expenditure Mining b Manufacturing Food, beverages and tobacco Textiles, clothing, footwear and leather Wood and paper products Printing, publishing and recorded media Petroleum, coal and chemical product Non–metallic mineral products Metal products Machinery and equipment Other manufacturing Total Total surveyed industries

Chain volume measures

c Gross fixed capital formation a

All sectors

a Estimates taken from ABS national accounts, which include taxation based statistics. b Includes industries covered by Division B (for example, the metallic and nonmetallic minerals, coal, oil and gas, construction materials and other nonmetallic minerals industries) as defined in the 1993 edition of the Australian New Zealand Standard Industrial Classification (ANZSIC). c Reference year is 2003-04. Sources: Australian Bureau of Statistics; ABARE.

236

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mineral exploration

15

Private mineral exploration expenditure

1999-00 $m

2000-01 $m

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

Energy Petroleum Onshore Offshore

110.1 613.2

176.9 866.9

164.6 718.1

191.3 803.8

230.5 713.6

270.1 774.6

Total

723.3

1 043.8

882.7

995.1

944.1

1 044.7

Coal Uranium

35.3 11.6

41.2 8.4

50.4 8.7

77.8 6.9

81.5 10.6

126.8 20.7

Total

770.2

1 093.4

941.8

1 079.8

1 036.2

1 192.2

Metals and other minerals a Gold Iron ore Base metals, silver and cobalt b Mineral sands Diamonds Other

374.8 29.7 156.8 21.5 29.8 16.9

370.1 23.4 165.3 23.6 31.8 19.5

331.3 25.2 132.9 33.2 35.4 23.6

378.4 44.5 142.1 27.3 29.9 25.9

397.1 63.7 151.9 23.8 25.9 32.2

391.7 137.9 261.3 27.6 23.7 38.7

At current prices

Total metals and other minerals a Total expenditure

629.5

633.7

581.6

648.1

694.6

880.9

1 399.4

1 727.4

1 522.8

1 727.6

1 730.7

2 073.1

a Uranium is included with energy. b Base metals include copper, lead, nickel and zinc. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

237

world prices

16

Annual world indicator prices of selected commodities

Crops Wheat a Corn b Rice c Soybeans d Cotton e Sugar g Livestock products Beef h Wool i Butter j Cheese j Skim milk powder j Energy Crude oil Dubai West Texas intermediate Brent World trade weighted average k Coal l Thermal Metallurgical Uranium (U3O8) m Minerals and metals n Aluminium Copper Gold o Iron ore (negotiated) q Lead Manganese (negotiated) r Nickel Silver t Tin Zinc

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s 2006-07 f

US$/t US$/t US$/t US$/t USc/lb USc/lb

128 90 192 201 41.8 7.6

160 107 199 245 55.4 8.0

160 115 220 321 68.3 7.9

154 97 278 275 52.2 10.5

163 102 296 263 56.5 16.4

166 104 276 272 53.0 17.4

USc/kg

227

202

243

286

276

236

Ac/kg

841

1 049

820

746

700

671

US$/t

1 152

1 186

1 621

2 209

2 054

2 000

US$/t

2 000

1 775

2 358

2 803

2 800

2 750

US$/t

1 619

1 587

1 862

2 211

2 200

2 180

US$/bbl US$/bbl US$/bbl US$/bbl

21.83 23.85 22.79 21.59

25.90 29.92 27.82 26.26

29.06 33.76 31.24 29.33

40.72 48.77 46.23 41.18

54.60 61.02 59.25 54.18

52.06 58.56 56.43 51.56

US$/t US$/t

30.14 40.75

25.86 41.85

29.45 43.13

47.14 68.59

48.65 116.02

46.05 101.90

US$/lb

9.59

10.22

14.90

22.20

35.14

39.27

US$/t US$/t US$/oz USc/dltu US$/t US$/mtu US$/t USc/oz US$/t US$/t

1 360 1 508 288 28.98 474 2.11 5 919 442 4 128 791

1 361 1 595 334 28.28 445 1.97 7 673 461 4 371 775

1 568 2 333 389 30.83 700 2.12 12 264 579 6 617 962

1 807 3 150 422 36.571 964 2.45 14 971 695 8 491 1 171

2 063 4 566 506 62.72 1 061 3.98 13 961 830 7 157 1 717

1 991 4 167 578 69.93 789 3.54 12 971 798 6 579 1 765

a US hard red winter wheat, fob Gulf. b US no. 2 yellow corn, delivered US Gulf. c Prices previously reported by the Thailand Board of Trade are no longer available. From September 1998 the price quoted is the USDA sourced nominal quote for Thai white rice, 100 per cent, Grade B, fob, Bangkok (August–July basis). d US cif Rotterdam (October–September basis). e Cotlook 'A' index. g Average of monthly averages of New York no.11 spot price; basis: fob Caribbean ports (October-September basis). h US cif price. i Australian Wool Exchange eastern market indicator. j Average of traded prices (excluding subsidised sales). k World trade weighted average price compiled by the US Department of Energy. Official sales prices or estimated contract terms for major internationally traded crude oils. l Average export unit value, fob Australia. m Average of weekly restricted spot prices over the period, published by Ux Consulting. n Average LME spot price unless otherwise stated. o London gold fix, London Bullion Market Association. q Australian hematite fines to Japan (fob) for Japanese fiscal year commencing 1 April. r Japanese fiscal year commencing 1 April. t London silver fix, London Bullion Market Association. Prior to March 2001, Handy and Harman, commercial bar price used. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Meat and Livestock Australia; Australian Wool Exchange; Cotlook Ltd; Food and Agriculture Organisation; General Agreement on Tariffs and Trade; International Energy Agency; International Wheat Council; ISTA Mielke and Co.; London Bullion Market Association; The London Metal Exchange Ltd; New York Board of Trade; Reuters Ltd; Ux Consulting Company; Platts Oilgram; US Department of Agriculture; US Department of Energy; World Bureau of Metal Statistics; ABARE.

238

australian commodities

> vol. 13 no. 1 > march quarter 2006

world prices

17

Quarterly world indicator prices of selected commodities

2004-05

Crops Wheat a Corn b Rice c Soybeans d Cotton e Sugar g Livestock products Beef h Wool i Butter j Cheese j Skim milk powder j Energy Crude oil Dubai West Texas intermediate Brent World trade weighted average k Coal l Thermal Metallurgical Uranium (U3O8) m Minerals and metals n Aluminium Copper Gold o Lead Nickel Silver q Tin Zinc

2005-06 Mar s

2006-07

Unit

June

Sep

Dec

June f

Sep f

Dec f

Mar f

June f

US$/t US$/t US$/t US$/t USc/lb USc/lb

149 97 298 291 54.4 10.3

159 101 287 278 53.6 11.2

170 97 286 259 56.6 13.5

165 105 302 266 58.3 18.2

162 105 305 261 57.6 17.5

163 99 265 266 55.0 16.4

171 103 259 263 52.3 17.5

167 107 287 273 52.8 17.2

165 107 293 266 53.5 17.1

USc/kg

285

287

280

272

266

252

240

230

222

Ac/kg

723

705

653

725

720

671

671

671

671

US$/t

2 217

2 233

2 008

1 990

1 985

2 000

2 000

2 000

2 000

US$/t

2 917

2 917

2 833

2 740

2 710

2 750

2 750

2 750

2 750

US$/t

2 200

2 283

2 216

2 150

2 150

2 180

2 180

2 180

2 180

US$/bbl

48.15

55.92

53.70

55.83

52.96

54.37

51.76

52.43

49.69

US$/bbl US$/bbl

53.16 51.58

63.08 61.58

60.24 57.15

62.03 60.95

58.73 57.34

59.75 59.00

58.25 55.96

59.80 56.90

56.43 53.84

US$/bbl

47.13

56.50

52.33

55.46

52.42

53.95

51.12

51.95

49.20

US$/t 50.40 48.25 49.70 50.45 US$/t 118.47 118.76 118.40 118.23 US$/lb 27.33 30.32 34.67 37.58

46.18 108.71 38.00

46.22 108.15 38.58

46.27 108.68 39.00

46.32 108.24 39.50

45.39 82.53 40.00

US$/t 1 790 1 830 2 072 2 225 US$/t 3 388 3 754 4 301 5 011 US$/oz 427 439 485 555 US$/t 987 892 1 012 1 212 US$/t 16 421 14 569 12 639 14 168 USc/oz 715 707 807 915 US$/t 7 955 7 046 6 432 7 680 US$/t 1 273 1 292 1 637 2 000

2 125 5 200 545 1 128 14 468 890 7 467 1 940

2 025 4 467 565 922 13 368 820 6 867 1 750

2 000 4 200 575 783 12 818 790 6 533 1 750

1 980 4 200 580 750 13 100 800 6 500 1 790

1 960 3 800 590 700 12 600 780 6 417 1 770

a US hard red winter wheat, fob Gulf. b US no. 2 yellow corn, delivered US Gulf. c Prices previously reported by the Thailand Board of Trade are no longer available. From September 1998 the price quoted is the USDA sourced nominal quote for Thai white rice, 100 per cent, Grade B, fob, Bangkok. d US cif Rotterdam. e Cotlook ’A’ index. g Average of monthly averages of New York no.11 spot price; basis: fob Caribbean ports. h US cif price. i Australian Wool Exchange eastern market indicator. j Average of traded prices (excluding subsidised sales). k World trade weighted average price compiled by the US Department of Energy. l Average export unit value, fob Australia. m Average of weekly restricted spot prices over the period, published by Ux Consulting. n Average LME spot price unless otherwise stated. o London gold fix, London Bullion Market Association. q London silver fix, London Bullion Market Association. Prior to March 2001, Handy and Harman, commercial bar price used. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Meat and Livestock Australia; Australian Wool Exchange; Cotlook Ltd; Food and Agriculture Organisation; General Agreement on Tariffs and Trade; International Energy Agency; International Wheat Council; ISTA Mielke and Co.; Reuters Ltd; London Bullion Market Association; The London Metal Exchange Ltd; New York Board of Trade; Ux Consulting Co.; Platts Oilgram; US Department of Agriculture; US Department of Energy; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

239

unit values

18

Australian gross unit values or prices of farm products a

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

$/t $/t $/t $/t $/t $/t $/t

208 384 288 250 175 195 262

255 389 344 292 219 258 266

169 403 232 236 138 153 216

161 327 212 202 127 195 191

163 324 202 190 168 179 220

167 337 210 186 167 183 246

$/t $/t $/t

198 274 173

233 348 205

223 325 159

256 297 150

205 332 168

209 315 174

$/t $/t

353 390

384 400

365 349

283 341

272 328

277 334

c/kg $/t $/t

194 31 844

222 28 817

225 23 766

167 26 697

181 28 668

174 35 493

c/kg

306

256

290

320

325

295

c/kg

335

289

327

359

370

335

c/kg

314

284

307

331

325

304

c/kg

285

227

262

289

290

266

Crops b Grains and oilseeds Winter crops Barley Canola Field peas Lupins Oats Triticale Wheat Summer crops Maize Rice Sorghum Soybeans c Sunflowerseed c Industrial crops Cotton lint d Sugar cane (cut for crushing) Wine grapes

Livestock for slaughter Beef e – yearling e – ox e – cow e Lamb eg Mutton e Pig e Poultry h

c/kg

300

338

372

344

348

346

c/kg

180

167

199

162

165

164

c/kg

281

244

235

253

240

235

c/kg

380

385

379

377

382

386

c/kg

841

1 049

820

746

700

671

c/L

33.0

27.1

27.9

31.0

33.0

33.1

Livestock products Wool i Milk j

a Average gross unit value across all grades in principal markets, unless otherwise indicated. Includes the cost of containers, commission and other expenses incurred in getting the commodities to their principal markets. These expenses are significant. b Average unit gross value relates to returns received from crops harvested in that year, regardless of when sales take place, unless otherwise indicated. c Price paid by crusher. d Australian base price for sales in the financial year indicated. e Average saleyard price (dressed weight). g Lamb saleyard weight indicator 18–20 kg. h Retail, frozen. i Australian Wool Exchange eastern market indicator. j Weighted average farmgate price. s ABARE estimate. f ABARE forecast. Note: Prices used in these calculation exclude GST. Sources: Australian Bureau of Statistics; ABARE.

240

australian commodities

> vol. 13 no. 1 > march quarter 2006

world

19

World production, consumption, stocks and trade for selected commodities a

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

Mt Mt Mt Mt

582 586 197 107

566 600 164 106

555 593 127 102

625 613 140 109

616 618 138 108

599 619 117 111

Mt Mt Mt Mt

892 903 196 103

874 901 167 104

914 942 135 103

1 008 972 172 101

958 971 165 100

967 976 157 102

Mt Mt Mt

399 409 140

377 404 111

391 416 87

401 415 73

407 414 66

411 420 57

Mt

28

28

27

27

25

26

Mt Mt

325 325

329 325

334 337

379 369

389 379

377 381

Mt

20

25

23

34

43

40

Mt

63

70

67

75

80

82

Mt Mt

93 92

96 96

102 100

110 108

114 114

109 115

Farm Grains Wheat Production Consumption Closing stocks Exports b Coarse grains Production Consumption Closing stocks Exports b Rice Production c Consumption c Closing stocks c Exports bd Oilseeds and vegetable oils Oilseeds Production Consumption Closing stocks Exports Vegetable oils Production Consumption Closing stocks Exports Vegetable protein meals Production Consumption Closing stocks Exports Industrial crops Cotton Production Consumption Closing stocks Exports Sugar Production Consumption Closing stocks Exports

Mt

8

7

7

8

8

8

Mt

33

36

38

42

44

45

Mt Mt

183 181

185 185

190 190

205 205

213 212

211 214

Mt

6

6

5

5

6

6

Mt

53

54

58

59

62

62

Mt Mt Mt Mt

22 20 11 6

19 21 9 7

21 21 9 7

26 24 11 8

24 25 11 9

25 25 11

Mt Mt Mt Mt

137 136 60 43

148 141 66 44

143 145 65 45

144 148 61 46

150 151 61 47

152 153 59 45 Continued

australian commodities > vol. 13 no. 1 > march quarter 2006

241

world

19

World production, consumption, stocks and trade for selected commodities a

Livestock products Meat deg Production Consumption Closing stocks Exports b Wool h Production Consumption di Closing stocks j Exports k Butter dg Production Consumption Closing stocks Exports Skim milk powder gl Production d Consumption d Closing stocks d Exports

2005-06 s

continued

Unit

2001-02

2002-03

2003-04

2004-05

2006-07 f

Mt Mt Mt Mt

206 202 9.2 17.5

207 204 12.3 18.2

212 208 16.1 18.9

217 211 17.5 20.9

223 217 23.3 21.7

na na na na

kt kt kt kt

1 308 1 311 106 770

1 274 1 256 124 567

1 231 1 214 164 533

1 237 1 237 163 578

1 242 1 241 165 588

1 263 1 262 166 599

kt kt kt

3 507 6 018 731

3 060 6 161 733

3 020 6 321 784

2 971 5 262 485

2 740 5 450 235

2 971 5 262 485

kt

733

852

883

660

550

588

kt

3 676

3 655

3 363

2 971

2 500

2 971

kt

3 027

3 030

3 234

2 556

2 700

2 556

kt

1 129

1 044

949

775

575

775

kt

966

954

1 029

1 110

970

955

mbd mbd mbd

76.6 28.6 77.9

79.7 30.7 79.2

83.0 33.0 82.2

84.1 34.0 83.3

86.4 35.0 85.1

89.0 36.8 86.7

days

55.0

52.0

52.0

51.0

53.0

na

Mt Mt

3 902 885

4 231 893

4 629 879

4 779 871

4 885 865

4 991 857

Mt Mt

179 474

199 515

208 550

215 571

225 584

210 593

kt kt

36.5 77.5

41.7 77.8

46.4 78.5

50.0 79.0

51.0 79.9

58.2 80.6

kt kt

154 419 51 488

166 656 54 288

174 162 57 836

180 362 60 992

190 316 65 012

199 928 68 719

Energy d Crude oil Production World m OPEC n Consumption m Closing stocks OECD o Coal d Production Hard coal q Brown coal Exports Metallurgical coal Thermal coal Uranium (U3O8) d Production rs Consumption Metals d Bauxite production Alumina production Aluminium Production Consumption Closing stocks t Exports

kt kt kt kt

26 25 3 15

145 337 444 911

28 27 3 16

000 425 672 686

29 29 3 18

822 543 033 135

31 31 2 18

505 437 862 188

32 33 2 18

884 006 740 242

34 34 2 18

573 655 658 297

Continued

242

australian commodities

> vol. 13 no. 1 > march quarter 2006

world

19

World production, consumption, stocks and trade for selected commodities a

Iron and steel d Production Iron ore Pig iron Crude steel Seaborne iron ore trade Gold d Mine production Supply Fabrication consumption u Base metals d Copper Production v Consumption Closing stocks w Lead Production v Consumption Closing stocks w Nickel Production v Consumption Closing stocks w Tin Production v Consumption Closing stocks w Zinc Production v Consumption Closing stocks w Mineral sands d Production Ilmenite x Titaniferous slag Rutile concentrate Zircon concentrate

Unit

2001-02

2002-03

2003-04

2004-05

Mt Mt Mt Mt

1 109 583 904 545

1 213 636 968 586

1 349 688 1 057 586

t t t

2 592 3 972 3 147

2 593 4 149 2 994

kt kt kt

15 351 15 039 1 711

kt kt kt

continued

2005-06 s

2006-07 f

1 443 725 1 129 657

1 545 778 1 200 699

1 622 812 1 244 741

2 462 3 842 3 168

2 495 3 998 3 311

2 557 4 017 3 260

2 611 4 011 3 311

15 239 15 365 1 411

15 826 16 716 719

16 500 16 700 519

17 320 17 250 589

18 130 17 830 836

6 678 6 663 483

6 749 6 801 407

6 832 7 136 299

7 583 7 550 160

7 914 7 730 311

8 249 7 980 533

kt kt kt

1 185 1 176 97

1 201 1 228 98

1 250 1 253 98

1 286 1 275 109

1 346 1 341 114

1 411 1 390 135

kt kt kt

266 277 49

277 303 38

348 339 28

348 344 32

368 360 41

380 377 43

kt kt kt

9 721 9 391 1 095

9 870 9 828 1 181

10 170 10 477 1 020

10 430 10 690 810

10 740 11 040 550

11 340 11 370 570

kt kt kt kt

10 238 2 049 458 1 129

10 179 1 995 389 1 137

10 417 2 082 378 1 168

10 574 2 285 409 1 152

10 607 2 160 541 1 371

11 071 2 170 681 1 586

a Some figures are not based on precise or complete analyses. b Includes intra–EU trade. c Milled equivalent. d On a calendar year basis, e.g. 1991-92 = 1992. e Beef and veal, mutton, lamb, goat, pig and poultry meat. g Selected countries. h Clean equivalent. i Virgin wool at the spinning stage in 65 countries. j Held by marketing bodies and on-farm in five major exporting countries. k Five major exporting countries. l Nonfat dry milk. m Includes crude oil, marine bunkers, refinery fuel, nonconventional oil and natural gas liquids. 1 million litres a year equals about 17.2 barrels a day. n Includes OPEC natural gas liquids. o Industry stocks in OECD countries at the start of the financial year. q Includes anthracite and bituminous coal, and for the United States, Australia and New Zealand, sub-bituminous coal. r World production data has been revised to exclude reprocessed uranium. t LME and producer stocks. u Includes jewellery consumption. v Primary refined metal. w Commercial stocks excluding former and current centrally planned economies. x Excludes some small producers and large tonnages produced from ilmenite–magnetite ore in the Commonwealth of Independent States. s ABARE estimate. f ABARE forecast. na Not available. Sources: Australian Bureau of Statistics; Meat and Livestock Australia; Commodities Research Unit; Commonwealth Secretariat; Consolidated Gold Fields; Department of Agriculture, Fisheries and Forestry Australia; Economic Commission for Europe; Fearnleys; Food and Agriculture Organisation; Gold Fields Mineral Services; International Atomic Energy Agency; International Energy Agency; International Iron and Steel Institute; International Lead–Zinc Study Group; International Nickel Study Group; International Sugar Organization; International Wheat Council; ISTA Mielke and Co.; Metallgesellschaft A.G.; Ministry of Agriculture, Forestry and Fisheries (Japan); New Zealand Dairy Board; New Zealand Wool Board; UNCTAD Trust Fund on Iron Ore; United Nations; Uruguayan Association of Wool Exporters; US Department of Agriculture; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

243

Australia

20

Australian commodity production

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

kt kt kt kt kt kt kt kt

8 280 1 756 258 512 1 215 1 434 860 24 299

3 865 871 136 178 726 957 327 10 132

10 382 1 703 178 487 1 180 2 018 826 26 132

7 708 1 496 116 321 948 1 321 615 22 605

9 869 1 405 116 438 1 075 1 408 675 25 090

9 289 1 391 122 372 1 011 1 306 595 24 548

kt kt kt kt kt kt kt

1 054 454 1 192 2 021 63 70 40

546 310 438 1 465 18 25 63

494 395 553 2 009 74 58 72

912 312 323 2 184 56 62 81

819 391 1 001 2 308 49 112 83

885 376 1 098 1 988 52 113 84

kt

43 507

20 056

46 560

39 060

44 838

43 229

kt kt kt kt

703 31 424 4 987 1 606

387 36 995 5 461 1 411

349 36 993 4 994 1 895

645 37 485 5 196 1 937

578 38 169 5 108 1 921

617 38 260 5 203 1 902

’000 ’000 ’000 ’000 ’000 ’000

8 587 797 14 441 17 400 6 443 5 402

9 228 968 13 657 16 870 5 843 5 742

8 779 578 10 421 16 562 3 843 5 591

8 853 550 11 443 17 331 3 233 5 339

8 505 515 11 500 18 176 4 468 5 300

8 675 611 11 730 18 908 4 850 5 200

kt kt kt kt kt

2 028 348 296 396 705

2 073 329 268 420 726

2 033 341 220 406 732

2 162 354 237 388 792

2 070 382 239 380 810

2 096 399 244 378 825

kt

3 773

3 816

3 732

3 933

3 881

Crops Grains and oilseeds Winter crops Barley Canola Chickpeas Field peas Lupins Oats Triticale Wheat Summer crops Cottonseed s Maize Rice Sorghum Soybeans Sunflowerseed Other oilseeds a Total grains and oilseeds Industrial crops Cotton lint Sugar cane (cut for crushing) Sugar (tonnes actual) Wine grapes

Livestock slaughterings Number slaughtered Cattle and calves Cattle exported live b Sheep Lambs Sheep exported live b Pigs Meat produced Beef and veal c Lamb c Mutton c Pig meat Poultry meat c Total

3 942 Continued

244

australian commodities

> vol. 13 no. 1 > march quarter 2006

Australia

20

Australian commodity production

continued

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s 2006-07 f

kt ML kt kt kt kt kt kt

605 11 271 164 413 14 261 239 17

550 10 326 163 368 13 215 170 16

523 10 075 149 384 14 184 187 14

525 10 125 147 386 13 189 189 13

528 10 250 147 391 15 183 191 15

537 10 360 142 400 16 170 200 16

'000 m3

24 542

26 717

25 684

25 123

25 632

27 768

kt kt kt kt kt kt kt kt kt

15.9 137.3 29.4 14.3 5.9 5.6 10.2 8.7 8.1

14.7 151.7 26.4 17.1 5.2 9.6 10.5 9.9 8.1

14.4 164.7 27.5 19.9 5.8 9.3 12.7 10.9 7.8

11.1 182.0 23.6 18.1 5.9 15.4 13.0 10.2 7.2

13.4 161.0 25.4 17.2 5.6 12.3 13.8 9.0 8.7

13.3 158.4 25.9 17.8 5.7 10.8 13.1 9.0 8.7

Mt Mt Mt

272.6 344.4 68.7

274.9 348.9 68.8

285.9 362.2 70.0

300.7 389.7 70.6

308.8 399.8 71.2

320.1 413.2 71.9

ML ML

36 100 46 677

33 320 46 723

27 876 43 486

25 364 44 555

26 896 43 584

28 279 45 029

Gm3 ML

35.8

36.8

37.0

41.2

45.7

49.2

4 647

4 681

4 639

4 625

4 643

4 667

t

7 823

9 172

9 569

10 964

11 883

11 284

Mt kt kt

53.9 16 417 1 809

54.5 16 413 1 855

56.3 16 690 1 877

57.8 17 161 1 890

61.5 18 283 1 930

65.2 20 480 1 931

kt

876

883

811

905

955

1 045

kt

561

537

459

478

484

560

t

264.6

277.8

266.7

265.4

264.8

301.9

Livestock products Wool d Milk e Butter g Cheese Casein Skim milk powder h Wholemilk powder Buttermilk powder

Forestry Roundwood

Fisheries

i

Tuna j Other fish k Prawns Rock lobster Abalone Scallops Oysters Other molluscs Other crustaceans

Energy Coal Black, salable Black, raw Brown Petroleum Crude oil and condensate Petroleum products l Natural gas m LPG (naturally occurring) Uranium (U3O8)

Metalliferous minerals and metals Aluminium Bauxite Alumina Aluminium (ingot metal) Copper Mine production o Refined, primary Gold Mine production o

n

Continued

australian commodities > vol. 13 no. 1 > march quarter 2006

245

Australia

20

Australian commodity production

Unit

continued

2001-02

2002-03

2003-04

2004-05

2005-06 s 2006-07 f

Metalliferous minerals and metals (continued) Iron and steel Ore and concentrate q Iron and steel Lead Mine production o Refined r Bullion Manganese Ore, metallurgical grade Metal content of ores and concentrates Nickel Mine production o Refined, class I s Refined, class II u Total ore processed v Silver Mine production o Refined Tin Mine production o Refined Titanium Ilmenite concentrate Leucoxene concentrate Rutile concentrate Synthetic rutile s Titanium dioxide pigment s Zinc Mine production o Refined Zircon concentrate

Mt Mt

185.3 8.3

198.9 9.4

221.5 9.5

252.3 7.6

278.5 8.0

311.0 8.2

kt kt kt

744 275 201

695 267 181

677 247 143

682 234 153

735 235 155

797 240 154

kt

1 850

2 472

3 062

3 554

4 203

4 248

kt

994

1 127

1 171

1 734

2 049

2 071

kt kt kt kt

193 120 11 235

183 117 13 230

185 112 12 234

194 116 10 241

198 120 10 243

207 123 10 258

t t

2 106 616

1 905 672

2 056 619

2 304 722

2 444 720

2 418 670

t t

8 173 829

6 222 708

1 512 553

2 055 445

2 581 567

3 881 431

kt kt kt kt

1 843 34 207 612

2 069 43 208 673

1 910 53 154 696

2 006 46 174 751

2 241 100 211 765

3 206 226 404 776

kt

186

189

196

203

202

207

kt kt kt

1 490 572 389

1 529 570 458

1 355 502 448

1 352 464 432

1 409 473 470

1 473 480 717

’000 ct kt

30 676 9 233

32 006 10 438

24 310 10 705

32 446 12 438

27 751 11 091

29 810 11 300

Other minerals Diamonds Salt

a Linseed and safflowerseed. b Excludes animals exported for breeding purposes. c In carcass weight and includes carcass equivalent of canned meats. d Greasy equivalent of shorn wool (includes crutching), dead and fellmongered wool and wool exported on skins. e Includes the wholemilk equivalent of farm cream intake. g Includes the butter equivalent of butteroil, butter concentrate, ghee and dry butterfat. h Includes mixed skim and buttermilk powder. i Liveweight. j Tuna captured under joint venture or bilateral agreements or transhipped at sea is included. k Includes an estimated value of aquaculture but excludes inland commercial fisheries. l Includes production from petrochemical plants. m Includes ethane, methane and noncommercial natural gas. n Uranium is included with energy. o Primary production, metal content. q Excludes iron oxide not intended for metal extraction. r Includes lead content of lead alloys from primary sources. t Products with a nickel content of 99 per cent or more. Includes electrolytic nickel, pellets, briquettes and powder. u Products with a nickel content of less than 99 per cent. Includes ferronickel, nickel oxides and oxide sinter. v Includes imported ore for further processing. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Consolidated Gold Fields; Coal Services Pty Limited; International Nickel Study Group; Queensland Government, Department of Natural Resources and Mines; Raw Cotton Marketing Advisory Committee; ABARE.

246

australian commodities

> vol. 13 no. 1 > march quarter 2006

value of production

21

Gross value of Australian farm and fisheries production

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

2005-06 s $m

2006-07 f $m

1 725 675 130 147 304 251 168 6 356

984 339 65 61 212 210 84 2 692

1 750 686 58 113 278 279 126 5 636

1 240 490 36 68 191 167 120 4 320

1 607 455 40 88 204 236 121 5 525

1 552 469 40 78 188 219 109 6 035

90 327 349 22 27 23

72 153 300 7 10 39

88 180 319 27 20 44

80 96 328 16 21 49

80 333 389 13 37 49

79 346 345 14 38 48

10 875

5 399

9 837

7 381

9 368

9 746

1 499

844

671

1 222

1 008

905

989 1 059

1 019 1 143

854 1 469

968 1 271

1 086 1 181

1 344 1 142

Crops Grains and oilseeds Winter crops Barley Canola Chickpeas Field peas Lupins Oats Triticale Wheat Summer crops Maize Rice Sorghum Soybeans Sunflowerseed Other oilseeds a Total grains and oilseeds Industrial crops Cotton lint and cotton seed b Sugar cane (cut for crushing) Wine grapes Total industrial crops

3 548

3 006

2 994

3 461

3 275

3 391

Other crops Fruit Vegetables Other crops nei c

2 333 2 269

2 408 2 126

2 350 2 356

2 306 2 120

2 315 2 150

2 325 2 200

2 236

2 442

2 820

2 443

2 410

2 370

Total other crops

6 838

6 976

7 526

6 869

6 875

6 895

21 260

15 380

20 356

17 711

19 518

20 032

Total crops

Continued

australian commodities > vol. 13 no. 1 > march quarter 2006

247

value of production

21

Gross value of Australian farm and fisheries production

continued

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

6 617 526

5 849 562

6 345 314

7 331 335

2005-06 s $m

2006-07 f $m

6 759 339

5 984 371

Livestock slaughterings Cattle and calves d Cattle exported live e Sheep g Lambs gh Sheep exported live Pigs Poultry Total livestock slaughterings k

544

468

454

418

430

436

1 181 392 968 1 175

1 161 408 911 1 273

1 318 266 879 1 264

1 325 207 924 1 358

1 448 307 858 1 408

1 509 332 836 1 452

11 434

10 669

10 879

11 940

11 590

10 963

2 713 3 717

3 318 2 795

2 397 2 808

2 196 3 139

2 276 3 391

2 216 3 429

320

296

336

335

340

335

40

30

40

40

40

42

Livestock products Wool i Milk j Eggs Honey and beeswax Total livestock products Total farm

6 791

6 439

5 580

5 709

6 047

6 022

39 485

32 488

36 815

35 361

37 154

37 018

1 369

1 513

1 482

1 444

1 470

1 585

323 546 429 502 247 23 57 175 42 65

317 561 364 461 216 35 62 150 38 62

278 554 358 408 196 25 77 150 46 62

167 534 304 416 230 46 89 123 68 58

187 572 326 430 221 39 75 161 61 62

198 594 330 462 208 36 74 167 61 62

2 430

2 284

2 167

2 059

2 152

2 207

Forestry products Roundwood

Fisheries products Tuna m Other fin fish n Prawns Rock lobster Abalone Scallops Oysters Pearls Other molluscs o Other crustaceans Total fish q

l

a Linseed, safflowerseed and peanuts. b Value delivered to gin. c Mainly fruit, vegetables and fodder crops. d Includes dairy cattle slaughtered. e Excludes animals exported for breeding purposes. g Excludes skin values. h Lamb saleyard indicator weight 18–20 kilograms. i Shorn, dead and fellmongered wool and wool exported on skins. j Milk intake by factories and valued at farmgate. k Total livestock slaughterings includes livestock disposals. l Value to fishermen of product landed in Australia. m Tuna captured under joint venture or bilateral agreements or transhipped at sea is included. n Includes an estimated value of aquaculture. o Includes Northern Territory aquaculture production. q Also includes fish and aquaculture values not elsewhere included. s ABARE estimate. f ABARE forecast. Note: The gross value of production is the value placed on recorded production at the wholesale prices realised in the market place. The point of measurement can vary between commodities. Generally the market place is the metropolitan market in each state and territory. However, where commodities are consumed locally or where they become raw material for a secondary industry, these points are presumed to be the market place. Note: Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

248

australian commodities

> vol. 13 no. 1 > march quarter 2006

areas, stock

22

Crop areas and livestock numbers

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

’000 ha ’000 ha ’000 ha

3 707 1 332 195

3 864 1 298 201

4 477 1 211 152

4 617 1 351 113

4 739 962 98

4 645 1 058 111

Crop areas Grains and oilseeds Winter crops Barley Canola Chickpeas Field peas Lupins Oats Triticale Wheat Summer crops Maize Rice Sorghum Soybeans Sunflowerseed Other oilseeds a

’000 ’000 ’000 ’000 ’000

ha ha ha ha ha

337 1 139 784 409 11 529

380 1 025 911 408 11 170

354 851 1 089 445 13 067

321 839 892 338 13 766

280 754 859 347 12 625

295 825 816 340 12 807

’000 ’000 ’000 ’000 ’000 ’000

ha ha ha ha ha ha

83 150 823 32 79 14

50 46 667 10 40 44

70 66 734 33 46 51

75 48 803 26 46 55

76 105 889 22 88 54

70 114 773 22 91 51

Total grains and oilseeds

’000 ha

21 293

20 612

23 070

23 910

22 514

22 638

Industrial crops Cotton Sugar cane b Winegrapes b

’000 ha ’000 ha

409 426

224 448

198 448

321 441

335 415

350 420

’000 ha

136

140

146

153

157

160

Cattle Beef Dairy milking herd d

million million million

24.74 3.13 2.12

23.62 3.05 2.05

24.41 3.05 2.01

24.74 2.99 2.01

25.51 2.99 2.01

26.31 2.99 2.01

Total Sheep

million million

27.87 106.2

26.66 99.3

27.46 101.3

27.73 102.7

28.50 105.1

29.30 106.6

Pigs

million

2.94

2.66

2.53

2.49

2.47

2.43

Livestock numbers

c

a Linseed and safflowerseed. b Cut for crushing. c At 30 June from. Details for establishments with an estimated value of agricultural operations of $5 000 or more. d Cows in milk and dry. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

249

yields

23

Average farm yields

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

t/ha t/ha t/ha t/ha t/ha t/ha t/ha t/ha

2.23 1.32 1.32 1.52 1.07 1.83 2.10 2.11

1.00 0.67 0.68 0.47 0.71 1.05 0.80 0.91

2.32 1.41 1.17 1.38 1.39 1.85 1.86 2.00

1.67 1.11 1.02 1.00 1.13 1.48 1.82 1.64

2.08 1.46 1.18 1.56 1.43 1.64 1.95 1.99

2.00 1.31 1.10 1.26 1.23 1.60 1.75 1.92

t/ha t/ha t/ha t/ha t/ha

5.47 7.95 2.46 1.95 0.88

6.20 9.52 2.20 1.77 0.62

5.64 8.38 2.74 2.21 1.26

4.16 6.73 2.72 2.13 1.35

5.17 9.53 2.60 2.29 1.27

5.40 9.60 2.57 2.31 1.24

t/ha t/ha t/ha

1.72 74 11.81

1.72 83 10.08

1.76 83 12.98

2.01 85 12.66

1.73 92 12.23

1.76 91 11.86

kg/sheep L/cow

4.38 5 309

4.25 5 037

4.51 5 025

4.42 5 050

4.37 5 110

4.38 5 162

Crops Grains and oilseeds Winter crops Barley Canola Chickpeas Field peas Lupins Oats Triticale Wheat Summer crops Maize Rice Sorghum Soybeans Sunflowerseed Industrial crops Cotton (lint) Sugar cane (for crushing) Winegrapes

Livestock Wool a Wholemilk

a Shorn (including lambs). s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; ABARE.

250

australian commodities

> vol. 13 no. 1 > march quarter 2006

export volumes

24

Volume of Australian commodity exports

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

kt kt kt kt kt kt kt

4 989 1 303 278 414 130 459 16 464

3 462 612 89 208 177 108 10 845

5 308 1 049 164 646 172 209 15 073

6 499 1 019 151 419 165 116 15 779

4 700 861 162 294 131 241 15 759

6 159 951 109 513 147 272 17 863

kt kt kt kt

594 580 586 23

259 591 70 16

167 234 289 19

214 268 513 28

293 258 262 31

369 655 299 47

kt

25 820

16 436

23 329

25 172

22 992

27 383

kt kt ML

719 3 644 416

596 4 167 508

459 4 060 581

410 4 271 661

593 4 121 749

550 4 197 859

Meat and live animals for slaughter kt Beef and veal gh ’000 Live cattle i kt Lamb g Live sheep i ’000 kt Mutton g Pig meat g kt kt Poultry meat g

902 797 118 6 443 166 59

902 968 102 5 843 162 63

860 578 119 3 843 129 51

948 550 128 3 233 144 43

888 515 142 4 468 145 42

925 611 150 4 850 147 40

21

23

20

20

23

24

Farm Grains and oilseeds Winter crops Barley a Canola Chickpeas Lupins Oats (unprepared) Peas b Wheat c Summer crops Cottonseed Rice Sorghum Other oilseeds d Total grains and oilseeds Industrial crops Raw cotton e Sugar Wine

Wool Greasy js Semiprocessed Skins Total js Dairy products Butter k Cheese Casein Skim milk powder Wholemilk powder

kt

403

307

321

373

376

381

kt (gr.eq.)

227

169

127

114

119

122

kt (gr.eq.)

56

28

27

29

30

31

kt (gr.eq.)

686

505

475

515

525

534

kt kt kt kt kt

123 218 9 210 165

111 208 8 181 142

83 212 8 155 117

69 227 7 141 105

70 232 9 154 126

70 236 10 139 144 Continued

australian commodities > vol. 13 no. 1 > march quarter 2006

251

export volumes

24

Volume of Australian commodity exports

continued

Unit

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

kt

4 721

5 437

5 264

5 598

5 592

6 617

kt kt

13.9 17.5

12.6 17.4

12.8 13.2

10.9 15.0

11.3 14.3

12.2 15.5

kt kt

0.8 10.9

0.6 8.7

0.3 8.9

0.4 9.6

0.4 10.4

0.7 9.8

kt kt

0.9 9.7

1.7 9.5

2.1 10.9

1.8 10.2

1.8 9.7

2.0 10.0

kt kt

2.0 2.0

1.7 2.5

2.1 2.8

2.0 2.0

2.0 1.9

2.1 2.3

kt

1.5

1.2

1.5

1.2

1.8

1.5

ML ML Mt

23 936 3 211 7.600

20 950 3 194 7.826

17 526 2 916 7.914

15 731 2 844 10.589

16 821 3 000 13.085

19 557 3 230 15.300

Forest products Woodchips

Fisheries products Tuna l Other fish Prawns m Headless Whole Rock lobster Tails Whole Abalone Fresh, chilled or frozen Prepared or preserved Scallops n

Mineral resources Energy Crude oil o LPG LNG qs Bunker fuel r Petroleum products Metallurgical coal Thermal coal Uranium (U3O8)

ML

2 267

2 238

2 216

2 207

2 194

2 180

ML

3 409

3 140

2 474

1 847

1 922

2 015

Mt

105.8

107.8

111.7

124.9

127.5

135.1

Mt

92.0

99.9

106.7

106.4

111.1

113.7

t

7 367

9 593

9 099

11 249

12 440

11 284 Continued

252

australian commodities

> vol. 13 no. 1 > march quarter 2006

export volumes

24

Volume of Australian commodity exports

Unit

Mineral resources (continued) Metalliferous minerals and metals t Aluminium t kt Alumina kt Aluminium (ingot metal) Copper kt Ore and concentrate kt Refined t Gold v Iron and steel Mt Iron ore and pellets kt Iron and steel w Lead kt Ores and concentrates kt Refined kt Bullion Manganese kt Ore s kt Nickel vs Titanium kt Ilmenite concentrate x kt Leucoxene concentrate kt Rutile concentrate kt Synthetic rutile s kt Titanium dioxide pigment t Refined silver t Tin v Zinc kt Ores and concentrates kt Refined Zircon concentrate y kt Other minerals Diamonds Salt

’000 ct kt

continued

2001-02

2002-03

2003-04

2004-05

2005-06 s

2006-07 f

13 091 1 490

13 168 1 551

13 572 1 546

14 073 1 512

14 813 1 637

16 715 1 602

1 271 388 280

1 193 359 282

1 286 301 315

1 326 322 309

1 520 317 308

1 568 365 308

156.1 3 297

181.5 3 589

194.8 3 818

228.5 2 338

269.6 2 380

306.1 2 780

380 236 153

366 269 150

417 231 113

417 243 164

670 231 169

822 241 154

1 660 210

2 014 209

2 603 214

3 128 213

3 172 215

3 780 224

914 60 190 398 145 547 8 026

1 020 41 195 456 147 511 5 963

783 125 146 470 165 415 143

633 93 158 520 175 517 1 529

949 126 201 545 173 414 2 106

1 901 226 384 574 176 478 3 450

1 849 496 388

1 913 486 445

1 844 396 443

1 953 397 428

1 962 396 465

2 075 407 709

25 811 8 912

32 274 10 172

24 326 10 285

32 515 12 128

27 751 10 575

29 810 11 074

a Includes the grain equivalent of malt. b Includes field peas and cowpeas. c Includes the wheat equivalent of flour. d Includes soybeans, linseed, sunflowerseed, safflowerseed and peanuts. Excludes meals and oils. e Excludes cotton waste and linters. g In shipped weight. Fresh, chilled or frozen. h Includes meat loaf. i Excludes breeding stock. j ABS recorded trade data adjusted for changes in stock levels held overseas by Wool International. k Includes ghee, dry butterfat, butter concentrate and butteroil, dairy spreads, all expressed as butter. l Exports of tuna landed in Australia. Tuna captured under joint venture or bilateral agreements or transhipped at sea is not included. m Excludes volume of other prawn products. n Includes crumbed scallops. o Includes condensate and other refinery feedstock. q 1 million tonnes of LNG equals about 1.31 billion cubic metres of gas. r International ships and aircraft stores. t Uranium is included with energy. u Exports of bauxite are confidential. v Quantities refer to total metallic content of all ores, concentrates, intermediate products and refined metal. w Includes all steel items in ABS, Australian Harmonized Export Commodity Classification , ch. 72, ’Iron and steel’, excluding ferrous waste and scrap and ferroalloys. x Excludes leucoxene and synthetic rutile. y Data from 1991-92 refer to standard grade zircon only. s ABARE estimate. f ABARE forecast. Sources: ABS, International Trade, Australia, cat. no. 5465.0, Canberra; Australian Mining Industry Council; Department of Foreign Affairs and Trade; Department of Agriculture, Fisheries and Forestry; International Nickel Study Group; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

253

export values

25

Value of Australian commodity exports (fob)

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

2005-06 s $m

2006-07 f $m

1 278 572 167 109 37 157 4 612

954 289 52 57 66 43 3 109

1 239 453 71 148 66 56 3 475

1 274 397 65 89 36 33 3 488

1 023 309 77 56 33 69 3 483

1 301 345 52 97 37 79 4 083

148 354 109 20

82 371 17 21

62 145 61 25

55 171 96 33

71 163 51 28

89 403 60 45

7 563

5 062

5 800

5 737

5 364

6 590

1 547 1 430 1 970

1 153 1 220 2 386

982 982 2 545

770 1 140 2 750

1 012 1 913 2 959

889 2 156 3 236

4 948

4 759

4 509

4 660

5 884

6 281

3 432 15 943

3 420 13 241

3 096 13 406

3 186 13 583

3 112 14 359

3 143 16 014

4 189 526 626 392 490 265 26 6 514

3 756 562 554 408 346 256 22 5 905

3 793 314 636 266 379 181 20 5 590

4 584 335 700 207 418 150 20 6 413

4 174 339 782 307 428 137 24 6 191

4 036 371 827 332 434 128 25 6 152

Farm Grains and oilseeds Winter crops Barley a Canola Chickpeas Lupins Oats Peas b Wheat c Summer crops Cottonseed Rice Sorghum Other oilseeds d Total grains and oilseeds Industrial crops Raw cotton e Sugar Wine Total Other crops Total crops Meat and live animals for slaughter Beef and veal Live cattle g Lamb Live sheep g Mutton Pig meat Poultry meat Total Wool Greasy h Semiprocessed Skins Total h Dairy products Butter Cheese Casein Skim milk powder Wholemilk powder Other dairy products Total Other livestock exports Total livestock exports Total farm exports

2 271

2 266

1 850

1 994

1 886

1 835

1 119 297

991 288

632 296

505 339

447 309

438 306

3 687

3 545

2 778

2 838

2 642

2 579

297 1 033 77 698 571 550

224 800 43 406 380 549

182 738 48 386 321 534

188 875 56 420 324 554

195 928 77 430 389 578

184 934 83 388 434 592

3 226

2 401

2 210

2 418

2 597

2 614

1 771

1 977

2 224

2 329

2 238

2 261

15 198 31 141

13 827 27 068

12 801 26 206

13 998 27 581

13 668 28 027

13 606 29 620 Continued

254

australian commodities

> vol. 13 no. 1 > march quarter 2006

export values

25

Value of Australian commodity exports (fob)

continued

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

2005-06 s $m

2006-07 f $m

712

808

794

858

874

1 029

326 176

321 164

273 137

166 139

180 136

197 155

19 239

12 193

5 151

7 153

6 148

10 161

65 420

113 344

103 318

101 330

93 356

108 350

123 140

109 107

117 120

124 139

122 118

124 114

34 404 153

29 332 121

35 310 81

33 291 61

47 301 84

41 311 87

2 100

1 844

1 652

1 542

1 590

1 657

Forest products Woodchips

Fisheries products Tuna i Other fish Prawns j Headless Whole Rock lobster Tails Whole Abalone Fresh, chilled or frozen Prepared or preserved Scallops k Pearls Other fisheries products Total Total rural exports l Derived as sum of above On balance of payments basis m

33 953

29 720

28 653

29 981

30 491

32 305

34 364

29 951

28 858

30 436

30 366

32 700

6 390 721 2 613 760 1 234 8 038 5 294

6 402 855 2 607 775 1 198 7 448 4 448

5 055 647 2 174 696 918 6 510 4 372

6 330 804 3 199 951 844 10 758 6 336

8 1 5 1 1 17 7

9 1 6 1 1 16 7

361

427

364

475

712

786

25 411

24 161

20 737

29 696

42 696

43 593

24 370

23 036

19 767

28 387

40 971

41 210

136 4 114 3 965

159 3 660 3 696

125 3 781 3 441

123 4 383 3 726

149 5 343 4 503

155 6 070 4 393

1 028 1 131

1 048 956

1 242 924

1 750 1 332

2 816 1 871

2 595 2 081

Mineral resources Energy Crude oil n LPG LNG Bunker fuel o Other petroleum products Metallurgical coal Thermal coal Uranium (U3O8) Total Derived as sum of above On balance of payments basis (excl. bunker fuel) Metalliferous minerals and metals Aluminium Bauxite s Alumina Aluminium (ingot metal) Copper p Ore and concentrate Refined

549 033 002 220 145 687 348

271 124 111 145 246 698 213

Continued

australian commodities > vol. 13 no. 1 > march quarter 2006

255

export values

25

Value of Australian commodity exports (fob)

2001-02 $m

2005-06 s $m

2006-07 f $m

5 523

6 721

7 878

5 277 2 004

8 120 2 031

14 279 1 640

18 026 1 723

289 203 165

387 199 142

490 305 246

748 291 271

862 281 251

312

371

473

634

849

135 16 149

82 33 94

63 25 114

99 37 163

202 68 315

293 428 2 320 136 38

253 399 3 090 118 1

308 422 3 667 161 8

369 431 3 467 148 23

397 443 3 367 169 35

670 757 282

677 557 260

852 614 319

1 237 894 413

1 340 969 635

28 125

28 045

28 966

35 056

46 548

53 104

512 267 2 392

789 233 2 555

531 186 2 622

650 226 3 020

626 209 3 064

625 213 3 104

56 707

55 782

53 042

68 649

93 143

100 639

Mineral resources (continued) Metalliferous minerals and metals (continued) 4 950 Gold p Iron and steel 5 160 Iron ore and pellets 1 484 Iron and steel Lead p 323 Ores and concentrates 211 Refined 195 Bullion Manganese 299 Ore s Titanium Ilmenite concentrate q 138 23 Leucoxene concentrate 167 Rutile concentrate Synthetic rutile s 296 Titanium dioxide pigment 460 2 032 Nickel s 163 Refined silver 49 Tin p Zinc p 735 Ores and concentrates 794 Refined 272 Zircon concentrate r Total Other minerals Diamonds s Salt Other Total mineral resources exports

continued

2002-03 $m

2003-04 $m

2004-05 $m

5 133

5 510

5 342 1 855

Total commodity exports Derived as sum of above On balance of payments t

90 661

85 502

81 695

98 629

123 635

132 945

90 310

84 958

81 204

98 134

122 289

132 194

a Includes the grain equivalent of malt. b Field peas and cowpeas. c Includes the wheat equivalent of flour. d Includes soybeans, linseed, sunflowerseed, safflowerseed and peanuts. Excludes meals and oils. e Excludes cotton waste and linters. g Excludes breeding stock. h On a balance of payments basis. ABS recorded trade data adjusted for changes in stock levels held overseas by Wool International. i Exports of tuna landed in Australia. Tuna captured under joint venture or bilateral agreements or transhipped at sea is not included. j Other prawn products included in other fisheries products. k Includes crumbed scallops. l Sum of farm, forest and fisheries products. m The value of exports derived as the sum of published detailed items differs from the balance of payments aggregates shown in table 6 for two main reasons: the ABS makes special adjustments to some recorded trade data for balance of payments purposes; and ABARE derives its own estimates, (using non-ABS sources), for several items as footnoted. For more detail on a balance of payments basis, see table 7. n Includes condensate and other refinery feedstock. o International ships and aircraft stores. p Value of metals contained in host mine and smelter products are not available separately and are included in the value of the mineral product or metal in which they are exported. q Excludes leucoxene and synthetic rutile; data from 1991-92 refer to bulk ilmenite only. r Data refers to standard grade zircon only. t As derived in table 6. s ABARE estimate. f ABARE forecast. Sources: ABS, International Trade, Australia, cat. no. 5465.0, Canberra; ABARE.

256

australian commodities

> vol. 13 no. 1 > march quarter 2006

import value

26

Value of Australian imports and exports of selected commodites

2001-02 $m

2002-03 $m

2003-04 $m

2004-05 $m

399 784

401 443

382 603

352 551

80 828

166 84

168 92

158 101

187 124

182 92

250

260

259

311

274

1 033 2 193

800 1 601

738 1 471

875 1 542

928 1 669

3 226

2 401

2 210

2 418

2 597

352 537

360 591

360 545

412 547

377 538

889

950

905

959

915

1 160 502

1 000 485

909 410

932 304

885 315

1 662

1 485

1 319

1 236

1 200

443 170 2 611 529

505 206 2 784 591

502 193 2 719 585

492 219 2 809 587

437 224 2 824 532

3 752

4 086

3 998

4 107

4 017

712 841 431

808 834 418

794 820 388

858 839 392

874 850 409

Total

1 984

2 060

2 002

2 089

2 133

Petroleum Imports Crude oil g Petroleum products h

7 458

8 610

6 594

9 995

11 991

1 625

2 050

3 595

5 123

7 237

9 083

10 661

10 190

15 118

19 227

6 390 721 2 613

6 402 855 2 607

5 055 647 2 174

6 330 804 3 199

8 549 1 033 5 002

760 1 234

775 1 198

696 918

951 844

1 220 1 145

11 719

11 838

9 490

12 126

16 949

Vegetable oilseeds and products a Imports Exports Dairy products Imports Cheese Other dairy products Total Exports Cheese Other dairy products Total Edible fisheries products Imports Shellfish b Fin fish Total Exports Shellfish b Fin fish c Total Forest products Imports Sawnwood Wood based panels Pulp and paper products Other d Total Exports Woodchips Pulp and paper products Other e

Total Exports Crude oil g LPG i LNG Bunker fuel j Other petroleum products Total

2005-06 s $m

a Includes peanuts, oilseeds, vegetable oils and vegetable protein meals. b Includes all crustaceans and molluscs including canned. c Excludes tuna transhipped at sea or captured under joint venture or bilateral agreements. d Includes roundwood, other processed wood and minor forest products. e Includes roundwood, sawnwood, sleepers, processed wood and minor forest products. g Includes condensate and other refinery feedstock. h Includes LPG. i Naturally occurring and refinery byproduct gas. j International ships and aircraft stores. s ABARE estimate. Sources: Australian Bureau of Statistics; Department of Agriculture, Fisheries and Forestry; ABARE.

australian commodities > vol. 13 no. 1 > march quarter 2006

257

abare management

contacts Executive director

Brian Fisher

[email protected]

Deputy executive director

Karen Schneider

[email protected]

6272 2033

Chief economist

Stephen Beare

[email protected]

6272 2040

Andrew Dickson

[email protected]

6272 2173

Vince O’Donnell Geoff Armitage John Hogan Keith Huggan

[email protected] [email protected] [email protected] [email protected]

6272 2255 6272 2367 6272 2056 6272 2031

Don Gunasekera Neil Andrews Jane Mélanie Troy Podbury

[email protected] [email protected] [email protected] [email protected]

6272 2366 6272 2242 6272 2266 6272 2244

Anna Matysek

[email protected]

6272 2170

Peter Gooday Leanna Tedesco Anna Heaney

[email protected] [email protected] [email protected]

6272 2138 6272 2295 6272 2066

Colin Mues Lisa Elliston Graham Love Vernon Topp

[email protected] [email protected] [email protected] [email protected]

6272 2027 6272 2091 6272 2055 6272 3823

Rhonda Treadwell Neil Bingham

[email protected] [email protected]

6272 2043 6272 2208

Annette Blyton Yvonne Kingsley Maree Finnegan Andrew Wright Denise Flamia

[email protected] [email protected] [email protected] [email protected] [email protected]

6272 2222 6272 2265 6272 2260 6272 2290 6272 2211

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Commodity outlook branch Branch manager Commodity outlook and regional conferences Commodity and food statistics Agriculture forecasting Minerals and energy forecasting

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258

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> vol. 13 no. 1 > march quarter 2006