Trade risks to keep shrinking Australia's resources earnings, report says

Australia's mining and energy export earnings are forecast to decline from an estimated A$385 billion in FY24-25 to A$352 billion by FY26-27, driven by elevated trade barrier risks, falling bulk commodity prices (notably iron ore from A$116B to A$97B), and a weak global economy influenced by U.S. trade policy uncertainties. While iron ore and LNG prices are expected to ease due to increased supply, the overall decline is partially offset by rising gold exports, projected to become the third-largest at A$56 billion, and a gradual recovery in lithium prices to over A$6.6 billion. This outlook underscores persistent headwinds for Australia's key export sectors amid a volatile global trade landscape.

Analysis

Australia's mining and energy export earnings are projected to decline sequentially over the next two fiscal years, falling from an estimated A$385 billion in 2024-25 to A$352 billion by 2026-27, according to a government report. This negative outlook is attributed to a confluence of factors, including elevated risks from global trade barriers, a weak global economy, and specific uncertainty stemming from U.S. trade policies that are causing businesses to delay investments. The decline is led by iron ore, the nation's top export, with its earnings forecast to fall from A$116 billion to A$97 billion by 2026-27 due to easing prices from higher global supply. A similar price pressure is expected for liquefied natural gas (LNG). Partially offsetting these headwinds is a strong forecast for gold, which is expected to become Australia's third-largest export at A$56 billion next year on the back of rising prices and volumes. Additionally, lithium revenues are projected to recover slowly but steadily, rising from A$4.6 billion to over A$6.6 billion by 2026-27, though this is insufficient to fully counteract the sharp decline in bulk commodities.

Key Decisions for Investors

• Investors should exercise caution on pure-play Australian iron ore and LNG producers, as government forecasts point to a multi-year decline in earnings driven by falling prices and rising global supply.
• The bullish outlook for gold and the recovering forecast for lithium suggest a strategic rationale for overweighting positions in gold miners and selectively increasing exposure to lithium companies to capture projected revenue growth.
• Closely monitor developments in U.S. trade policy and its impact on global growth, as these geopolitical factors are identified as the primary source of risk and uncertainty for the entire Australian resources sector.
• The projected fall in commodity export earnings could exert downward pressure on the Australian dollar (A$), a key consideration for foreign investors when evaluating sector-wide exposure.