A subdued outlook for oil and gas prices over the next two years is likely to limit growth in Australia's LNG export earnings, according to a key federal government economic forecaster.
The slack is likely to picked up by higher earnings from iron ore and metallurgical coal in the current financial year before earnings decline in 2018/19, according to a quarterly report by the government's Department of Industry, Innovation and Science.
Rising LNG volumes, led by a ramp up from newly built giant LNG terminals on Australia's east and west coast were expected to underpin the country's export earnings at a time when prices of traditional mining exports - iron ore and metallurgical coal - are easing.
However, international LNG prices are set to remain subdued at the same time that gas exporters come under pressure from the federal government to boost domestic supplies, meaning newly built giant LNG plants could operate below full capacity.
The outlook for LNG prices has deteriorated in line with expectations for oil prices, to which LNG prices are linked, chief economist Mark Cully said in the quarterly report.
"The OPEC production agreement has not been as successful as many expected in driving oil prices higher," he said.
"In addition, US oil production has been stronger than expected, and forecasts of future production continue to be revised higher."
Average LNG prices at Australian ports declined from $9 a gigajoule in June to $8.20 a gigajoule in July, the report said, quoting latest available data.
The report has cut LNG export revenue forecasts by $1.8 billion to $30.26 billion in 2017/18 and by $3.3 billion to $35.4 billion next year.
Despite lower earnings from LNG, overall earnings from resource and energy exports will rise to a record $211 billion in the 2017/18, as higher prices for iron ore and metallurgical coal boost revenues.
Resource and energy export earnings jumped 27 per cent in the 2016/17 financial year to $204 billion.
The high prices are not expected to last, with export earnings set to decline to $201 billion in 2018/19, as a combination of slowing demand growth from China's steel sector and increased global supplies result in a pull back in the value of mining exports.
The report expects iron ore prices to average $US64 a tonne in 2017 but decline to an average of $US50 a tonne in 2018 and $US49 a tonne in 2019.
Benchmark contract prices for coking coal are expected to average $US203 in 2017 but will likely decline 28 per cent to $US147 a tonne in 2018 and fall further to $US125 a tonne in 2019.
Investment bank UBS confirmed the downward trend, noting fundamentals look challenging for iron ore, although prices for iron ore and coal will be supported in the medium term.
"We expect Chinese commodity demand to moderate into 2018 on tightening credit/slowing property but believe the supply-demand outlook is still generally supportive," UBS mining analysts said in a note.