This analyst says Australia's key commodity exports will continue to benefit from strong Asian demand

Photo by Victor Fraile/Getty Images

The demand outlook for Australian iron ore and coking coal is pretty good if the chart below is anything to go by.

From the Commonwealth Bank, it shows global monthly crude steel output by individual nation and region over the past 15 years.

Source: Commonwealth Bank

After a moderation in recent years, leading some to conclude that the cyclical peak in global steel production had been reached, production levels have accelerated again this year, thanks in part to record output from China and India.

“Global steel output has increased 4.8% in the 12 months ending August,” says Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank.

“This lift reflects stronger output from China, up 5.2%, and to a smaller extent India, up 7.0%.

Dhar says that those two nations alone account for 50% and 6% of global steel production respectively.

And with crude steel production picking up again, he says that bodes well for demand for iron ore and coking coal — two key inputs in the steel making process — in the period ahead.

“Given their proximity to Australia and the absence of key resources domestically, Asian countries remain the primary buyers of Australian coking coal and iron ore exports,” says Dhar.

“China purchases over 80% of Australia’s iron ore shipments, followed by Japan (10%) and South Korea (7%).

“India, Japan and China each buy 20-25% of Australia’s coking coal exports,” he adds.

And after re-accelerating this year, Dhar says that steel production in China and India will likely remain firm in the period ahead, helping to boost demand for high grade iron ore and coking coal, something that Australia has in abundance.

“Australia’s iron ore exports to China will also increase as high-cost domestic production, which accounts for around 15% of China’s iron ore needs, is increasingly being replaced by low-cost imports,” he says.

“An absence of good-quality coking coal will mean that India will likely become the main consumer of Australian coking coal in coming years.”

Iron ore and coal are currently Australia’s largest goods exports by dollar value.

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