Five key factors in the energy outlook

• The macro environment

China as ever looms large for the Australian energy sector as the Asian giant continues to reshape its economy.

"China as ever looms large for the Australian energy sector as the Asian giant continues to reshape its economy.” - Daniel Hynes, senior commodities analyst, ANZ

The country is looking to shift away from being the ‘world’s factory’ with the services sector firmly in its sights. The result could be tighter monetary conditions which would have a flow-on effect for the Australian energy market.

In better news, this will be partly offset by fiscal spending programs which should mitigate the tighter conditions.

• Capacity cuts

Capacity reductions will have an impact on prices. China’s coal production may ebb and flow with changes to policy but the focus is likely to remain on coal and steel markets.

China will continue to manage domestic prices and indeed, the government has already moved to limit price volatility by asking state-owned coal companies to sign fixed contracts with steel mills and power generators for 2017.

As yet, only the thermal coal sector has an official price, which could trigger a policy reaction from the government.

Don't expect a target price to be made public this year but any such move could be extremely influential on seaborne trade and prices. China’s domestic targets would provide a very useful guide for international prices.

{CF_IMAGE}

• Environmental focus

Environmental issues – including pollution – are still a major focus for authorities in China. In the wake of the Paris Agreement on climate carbon emission mitigation the country’s commitment to curbing climate change and fossil fuel emissions stands to impact commodity markets in a variety of ways.

China’s changing energy mix doesn't signal the end of coal. It’s likely the country will struggle to kick its habit. Still, gas and renewables will benefit and we’re already seeing China’s LNG imports continue to grow. 

{CF_IMAGE}

{CF_IMAGE}

• The political landscape

Amid global political uncertainty, the impact of possible disruptions to trade could have ramifications within the commodity sphere.

US President Donald Trump’s attempts to reinvigorate the US coal industry may see additional coal hit the international market.

Whether or not the US will start exporting more coal is an unknown. China’s move to ban coal imports from North Korea will play a role.

Closer to home in Australia, the lack of development of our gas reserves, and a huge pick-up in demand from LNG projects in Queensland, means more is needed to encourage additional gas into the domestic market.

Without further exploration and development on the east coast, the gas market is likely to remain tight for the foreseeable future.

{CF_IMAGE}

• Supply side issues

Weather conditions continue to impact coal exports in countries such as Australia and Indonesia. Heavy rain for instance can impact seaborne supply considerably, with exports falling dramatically at a time when demand from China is rising.

The rise in prices is raising the risk of additional supply being induced back into the market. In the short term, that will come via operations that have been curtailed over recent years due to low prices.

A lack of investment in new greenfield operations will keep the level of new supply limited. 

{CF_IMAGE}

Mixed outlook

Overall the outlook for the energy market is split with expectations continuing to shift.

Factors such as infrastructure spending in China, lower inventories in the Chinese housing market and further capacity reduction in the industry loom as positives.

On the risk side, possible disruptions to trade, Chinese rate tightening (or even perceived tightening), and continued environmental issues and rate hikes in the US could dampen commodities in the short-to-medium term.

Daniel Hynes is a senior commodities analyst at ANZ

This story is an edited version of a presentation delivered  at ANZ’s Coal & Energy Dinner 2017