Tuesday, 4 December 2012

Australia begins to grapple with falling coal prices

Australia is one of the wealthiest countries in the world, consistently placing in the top ten in terms of GDP. The united, rich, yet isolated country largely has the incredible Chinese economic miracle to thank for their prosperity, and this looks set to continue for some time in the future.

Yet Australia relies heavily on coal deposits as a pillar of this robust economy. The fuel is seeing its highest consumption rates since the 1960s but the underlying realities of economics and geopolitics could cause a serious stir in the coal market.

After a slump in coal prices midway through this year, and a failure for those prices to rise appreciably since, this stout Australian pillar could be weakening as the world looks to a potential post-coal reality.

Australia was one of the few advanced economies to grow during the recent financial crisis, a result principally down to enormous coal exports. Total Australian exports to China were 12 percent ten years ago. Today the figure hovers near 30 percent, much of it coal. Predictions expect the Chinese demand for coal to increase dramatically over the next decade.

Metallurgical coal exports from Australia, are expected to rise by between eight and eleven percent annually until at least 2017. A report published by the Bureau of Resource and Energy Economics in July agreed with the forecast.

It could be a tad optimistic however, especially given that current market signals reflect a coal market swimming in excess coal. Global coal prices have struggled to bounce back after a nasty fall in June despite Chinese assurances of new economic policies.

Of course, Australia’s opulence rests on two major economic pillars, among others. Beijing needs raw material to power the gigantic engine that is mainland China. And Australia needs China to continue their incredible decade-long run at an economic miracle.

Coal, this dirty pollutant, can be extracted in significant quantities domestically in China but Beijing has poured billions into foreign direct investment to secure mining rights in places stretching from Central Africa to Oceania and South America. There are few coal mines where Chinese chequebooks are not welcome, Australia included.

It is a dangerous feedback loop however, to assume an economy will grow indefinitely so long as more raw materials are delivered. Good management is one thing, but double-digit growth cannot be sustained forever.

There is lively debate around China’s growth prospects. But there is little disparity that the proper “cruising speed” for the behemoth country is significantly more sluggish than the 10+ percent growth over the past decade. The question being asked is how China’s trading partners will cope when this rebalancing necessity becomes apparent.

China’s new leaders arrive as the Middle Kingdom begins to display serious signs of slowing down economically. Aside from the Chinese people themselves, and the vast ocean of poor Chinese will bear the brunt, countries currently relying on a growing China will suffer if China contracts.

China is by far the world’s largest coal market. It produced close to 3.52 billion tons of coal in 2011, or 45 percent of global coal output, and consumed 3.7 billion tons. More than anything else it is Chinese domination of the coal market that determines coal prices, even though the country became a net importer of coal as of 2009.

Given the wild spending of state loans invested in local-level assets, China has competently consolidated domestic coal mining. But the profit impact of slowing domestic demand for coal could see Chinese mine closures resulting in a return of Beijing’s nemesis: unemployment.

China’s influence over the coal market has important consequences for major suppliers like Australia. But if demand is to taper off it will be domestic Chinese mines feeling the economic forces before Australia. And slowing Chinese demand for coal is already affecting Australian mining operations.

Two thermal coal mines will temporarily close down, according to Centennial Coal, a subsidiary of Thai coal company Banpu, revealed in an announcement last week. The mine owners anticipated the closures explaining that falling coal prices could see more occur in the near future. Rio Tinto, BHP Bilton, and Xstrata have all recently announced similar closures or temporary idling of mines.

Another huge impact on coal prices is the industrial impact of fracking. This technique has liberated vast deposits of previously untapped natural gas reserves sending prices for the fuel tumbling down 56 percent in 2012. Coal prices, as a far dirtier fuel, struggle to compete with natural gas tending to follow them down without sign of return to previous highs.

Faced on all sides by a changeable export market for coal, a decelerating Chinese real estate sector, and an unfriendly regulatory environment at home, Australia is facing new strains impacting an important economic foundation.

This highlights the potential vulnerability for Australia in relying on coal as a chief export product in the face of a rapidly changing economic reality in the Pacific and the world.

1 comment:

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