King Coal will be an ‘Indispensable’ Pillar of Queensland’s Economy for Years to Come

Friday 11 January, 2019 | By: Dr Marcus Smith Categories: Finance and Trade;

Queensland coal and gas resources, along with the critically important agriculture industry, are the proverbial bedrock of a state economy whose fiscal constraints have been - in part - alleviated by better than expected performance of commodities during the last five years. 

The key driver to this is the continually growing Sino-Queensland relationship.

Australian Bureau of Statistics data shows this relationship more than eclipses the previously largest trade ties with Japan as well as a welcome and growing export program with India.

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The state of Queensland is a producer; ABS figures further confirm it to be by far the second largest exporting state, contributing around $7.253 billion (24 per cent) to total Australian merchandise exports in November 2018, and $80.490 billion (23.7 per cent) over the 12 months.

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Accordingly, together the resource states of Queensland and Western Australia generate over 65 per cent of Australia’s total merchandise export income.

The ‘big ticket’ items

Not surprisingly, coal, iron ore and natural gas are by far the largest contributors to Australia’s merchandise export income.

Interestingly, over the 12 months from December 2017 to November 2018, coal exports of $65.591 billion were larger than those of iron ore ($62.466 billion) for the first time since 2009 – representing 19.3 per cent and 18.4 per cent of Australia’s $339.007 billion of total merchandise exports, respectively.

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Statistics from the World Coal Association show that in 2017 Australia was the fourth largest producer of coal at 503 million tonnes, 8 per cent of the total of the worlds ten largest coal producers. 

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An article appearing in the New York Times in the same year, said that “1,600 new coal plants are planned or under construction in 62 countries … (which) would expand the world’s coal-fired capacity by 43 per cent”.

Looking at Queensland’s key merchandise trade, the following graph clearly highlights the economic contribution that resources and agriculture make to the Queensland economy. 

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Of course, coal dominates Queensland’s exports, generating $33.1 billion in 2017-18 and continuing to underpin the state’s economy.

In fact, figures from the Australian Department of Foreign Affairs and Trade indicate that since 2008, coal exports have typically represented between 40 and, at one time, more than 50 per cent of the state’s total exports.

Natural gas exports out of Gladstone have recently picked up significantly also, recording the largest annual total on record in 2017-18 at 20.58 million tonnes. Read it here: https://www.cciq.com.au/news/queensland-exports-continue-to-boom/  

It’s interesting to note that the export value for sugar - another significant agricultural export for Queensland and the backbone of many communities in regional Queensland – is not directly reported within the statistics.

Accordingly, Queensland produces 95 per cent of Australia’s sugar, which generates between $1.5 and $2.5 billion of export value per year. See here http://www.agriculture.gov.au/abares/Documents/research-topics/ag-commodities/AgCommodities201812_SugarOutlook_v1.0.0.pdf  

The China story

Australian Bureau of Statistics figures show Queensland’s merchandise trade to have grown strongly over the last couple of decades, particularly from about 2005.

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The following graph displays Queensland’s export growth in percentile terms relative to the other monthly values from October 2008 to November 2018.

This shows that while export values were elevated during 2018, relative monthly growth is shown to have been ordinary throughout the year with a seasonally large reading in May – but that growth is building upon an increasing base.

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Of course, much of the story of Queensland’s export success over the last couple of decades is explained by its growing relationship with China, a complementary economy, that started to pick up around 2009. 

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The growing importance of this relationship with China is further illustrated in the following graph showing that, while exports to China represented less than 10 per cent of Queensland’s total exports before 2009, they now represent about a third of the state’s total exports. 

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Forecasting the value of Queensland’s monthly exports

Looking into a possible future of what the value of Queensland’s exports may be over the next few years, I performed a regression on 10 years of monthly data to November 2018, which includes a sample size of 120 observations.

To be conservative in this forecast, I chose 10 years rather than a smaller sample to avoid the more recent heady years potentially overstating the projections. 

Accordingly, the following graph shows the results of the regression as well as displaying the key statistical outputs.

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Both the intercept and slope coefficients are found to be statistically significant with a relatively strong and positive association with time – and that’s a good thing.

Based on the past 10 years of monthly data, the linear model indicates that total exports can be expected to increase by about $29.2 million a month and using the coefficient outputs produces the following linear forecast of export values for the next three years. 

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The average of the absolute error between the export values between December 2008 and November 2018 and those of the linear regression line is $699 million (mean relative error = 15%, stdev = 11%).

The linear projection forecasts that exports can be expected to slow marginally from $7.043 billion to $6.988 billion per month in November 2019 – that’s about $55 million (-1%) lower.

In two years the model forecasts a value of $7.368 billion for the month of November in 2020 - $296 million greater than the current level (+4%); while in three years the November 2021 value is expected to be $7.689 billion for the month, which is $646 million higher (+9%) than the 2018 value.

Forecasting the value of Queensland’s monthly exports to China

The analysis wouldn’t be complete without investigating what Queensland’s export future may also look like with China over the next few years.

Similarly, ABS data for Queensland’s exports to China over the same 10-year period was sourced to produce the following regression statistics. 

King13Similarly, both the intercept and slope coefficients are statistically significant, it’s a strong positive association, and the linear model indicates that exports to China from Queensland can be expected to increase by around $12 million per month.

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The average of the absolute error between the export values to November 2018 and the corresponding forecast line is $259 million (mean relative error = 29%, stdev = 22%).

The distribution of these errors suggests that caution is warranted as the monthly trade data is quite volatile and may be rather difficult to predict with precision - one can clearly see in the regressions the relatively large observations over the last couple of years are quite extraordinary.

In fact, looking at the three years of observations up to September last year, further puts the astonishing growth in Queensland’s trade relationship with China into perspective.

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Interestingly, the linear projection using the 10-year sample indicates that exports are forecast to slow from $2.33 billion to $1.827 billion per month by November 2019 – a decrease of $503 million (-22%).

In two years the model forecasts exports of $1.972 billion per month in November 2020 - $358 million less than the current level (-15%); while in three years the monthly value is expected to be $2.117 billion, which is still $213 million lower (-9%) than the November 2018 figure.

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