Firm Chinese steel production is expected to underpin a rise in capital expenditure (capex) in Australia on expanding iron ore output capacity, the Reserve Bank of Australia (RBA) said, which in turn will support an increase in investment spending across the resources sector.
Information from the RBA's capex survey and the bank's liaison programme indicate that investment is expected to increase slightly over the year ahead as work on iron ore and coal projects increase, although growth is expected to be more moderate than was anticipated at the start of the year.
Future mining investment is expected to ease as a result of less work on iron ore and coal projects, along with the deferral of final investment decisions on some large LNG projects, Australia's central bank said.
Capex in Australia's resources sector dropped to a 12-year low in 2019 because of the extended drop in upstream spending as the last of the seven LNG projects sanctioned since 2009 was completed. But spending on coal and minerals projects rose.
Australia's three largest iron ore producers Rio Tinto, BHP and Fortescue Metals Group are all investing in new production capacity, with much of it replacing existing mine capacity, which is nearing exhaustion. Australian iron ore exports hit a record high in June, as firm demand from China offset the effects of the economic slowdown in other key markets and as Australian producers filled gaps left by lower Brazilian exports.
Chinese demand for imported iron ore has been strong, driven by increased construction activity and industrial production, the RBA said. Chinese authorities have also announced fiscal stimulus focused on infrastructure that has further supported the outlook for steel demand. Iron ore supplies from Brazil has also been subdued as a result of earlier measures to contain Covid-19 in important mining regions, as well as operational issues and weather-related disruptions since the start of the year.
The level of resource exports is expected to be a little lower over the 2020-21 fiscal year to 30 June than previously expected because of reduced coal and gold exports, which are expected to be more than offset by firmer iron ore exports, the RBA said.
Australia's thermal coal exports during January-June were slightly ahead of the same period in 2019, although the outlook for the second half is for lower sales as mining firms react to loss-making weaker prices.