ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

Chinese coal prices 'unlikely to recover for five years'

BY:ROWAN CALLICK From: The Australian June 08, 2013 12:00AM
Increase Text Size
Decrease Text Size
Print


Source: The Australian
THE coal price in China, which has slid by 24 per cent in the past 18 months, is unlikely to bounce back for five years or more, a leading expert on the Chinese resource industry, Michael Komesaroff, says.

Economist Ross Garnaut told The Weekend Australian that there would be some growth in Chinese demand for metals but it would be slower, while "there has been an expansion in supply capacity geared up in the expectation of stronger growth".

He said prices would come down at different rates for different commodities, with "the strongest decline in thermal coal due to China's environmental emphasis", while natural gas demand would be strongest.

Mr Komesaroff is an Australian who has worked in Asia's minerals industry for 30 years, mostly as a Rio Tinto executive but also with China National Nonferrous Metals Corp.

He is a commentator on the resources industry for influential publication China Economic Quarterly.

"For years, China's coal prices rode high on strong demand from power stations, steel mills and cement plants, which the country's coalmines were unable to satisfy," he said.

The recent price collapse reflected two factors: the restructuring of China's coalmining industry, which is based chiefly in Shanxi and Inner Mongolia, and a slackening in demand from energy-intensive industry. "The market dynamics today are quite different: supply now exceeds demand," Mr Komesaroff said.

Australia sold China $6.8 billion worth of coal last year, the second-biggest export product after iron ore. About 38 per cent was thermal coal, used for power generation, the rest coking coal for steelmaking.

Australia is the largest coal exporter in the world. Japan is its biggest market, buying 2.4 times as much as China, but until the recent downturn it had been China's rising demand that had been pushing the price up.

Mr Komesaroff said that to boost productivity and reduce fatal accidents, the number of mining companies in Shanxi was slashed from 2800 to 100, and the average mine output more than doubled.

He said that the larger, consolidated mines have acquired equipment that increases their output considerably.

Production had also been cranked up through the launch of new mines in Inner Mongolia, which now produced about 25 per cent of China's output, and this process was about to be repeated in the resource-rich northwestern region of Xinjiang, he said.

Rail capacity had been rapidly boosted, enabling coal to be delivered to markets more efficiently, at a much lower cost.

Demand was weakening at the same time, he said.

Electricity production grew at about 12 per cent per year over the decade to 2011, when it halved to less than 6 per cent, as the government targeted reduced energy intensity.

Nuclear power, rising from 2 per cent to 5 per cent of energy production within two years, and natural gas, slated to increase its power output by 50 per cent within two years, are growing rapidly, as are renewable sources.

Continue to short aussie dollar (against USD)
it should go further down back to probably 0.80...

Unlike iron ore, China has plenty of coal. The shortage is temporary due to years of under-investment(that mining coal was so profitable is only a recent event) and massive closure of smaller coal mines.

It is really laughable that many new and more expensive coal supplies come online to fulfill the Chinese demand. To fulfill Indian demand, maybe; but Chinese demand, unlikely.

I am eager to see that Australian dollar is below par with Singapore dollar again after almost 10 years?

There is an interesting article in edge magazine on coal industry in china. I learnt from e article that coal washing uses almost 1/6 of water in china total consumption at current strained water resources scenario. This may mean there is a limit on coal production capacity

BUSINESS LEADERS FORUM 2013
Coal facing a 'structural decline'

BY:ANDREW BURRELL From: The Australian June 29, 2013 12:00AM
Increase Text Size
Decrease Text Size
Print

COLIN Barnett has delivered a downbeat outlook for Australia's two most valuable export commodities, arguing that coal is facing a long-term structural decline and warning that the iron ore industry's period of record growth has ended.

But the West Australian Premier told The Australian & Deutsche Bank Business Leaders Forum in Perth yesterday that he did not believe his state was facing a recession as some had predicted.

He said while the WA resources sector would suffer cyclical peaks and troughs, it would continue to drive growth for decades.

But Mr Barnett's gloomy outlook for commodities contrasted sharply with his upbeat assessment at the same Perth event a year ago when both coal and iron ore were trading well above present levels.

He saved his most dire warning for coal, which is produced mainly in NSW and Queensland rather than WA.

"The change in the coal price is beyond cyclical: it is a structural change," he said. "And while coal remains the world's most used fuel for power generation and other purposes, the world is making policy decisions which mean that coal usage, in my view, will progressively decline. It's a long-term structural change and that should not be dismissed as something that is purely cyclical."


RECOMMENDED COVERAGE
BUSINESS LEADERS FORUM 2013

'Market forces drive energy security'

Mr Barnett said the days of rapid growth in Chinese steel production had finished, and he believed there would be no major expansion in the Pilbara iron ore industry once the present rounds by BHP Billiton, Rio Tinto and Fortescue Metals were completed.

BHP head of iron ore Jimmy Wilson told the forum the mining giant was one of the first companies to slow down its rate of expansion in response to the weaker demand growth.

BHP deferred a proposed $20 billion expansion of an outer harbour at Port Hedland in response to weaker Chinese economic growth and was instead "focusing on more efficient growth from a capital-intensity point of view".

Mr Wilson said BHP had since concentrated on improving productivity.

"As we look forward, we're very much driven by the markets, and our business is going into a phase now where we're looking for efficiencies and effectiveness," he said. "Probably the most significant opportunity we have is actually deriving more volume through our existing capacity."

Fortescue Metals Group chief executive Nev Power said job losses in the mining industry were concerning because of the multiplier effect. Fortescue responded to a sharp drop in the iron ore price in September last year by laying off 1000 workers and shelving expansion plans at its Solomon hub in the Pilbara but was able to reactivate the development within a few months.

"It's not just about mining equipment and mining employees," Mr Power said.

"The spread goes much, much further than that, into accommodation services, all kinds of flights, companies supplying maintenance, shutdowns, manufacturing businesses," he said.

Mr Barnett accused governments of being "policy lazy" during the boom in areas including productivity. He said the good times had also raised expectations unrealistically. "The obvious example would be unrealistic and unsustainable wage expectations on major projects, which have been a significant factor in costs.

"We've also seen a fairly lazy approach in areas like productivity, which has been flat, and certainly declining relative to many of our competitors," Mr Barnett said.

"I don't think you can just blame the unions for that. I think government shares part of the blame and I think the corporate sector also shares part of the blame.

"To some extent, even though there are job losses throughout the structures of most organisations in mining, maybe that's a little bit of a cleansing that was long overdue.

"We've also seen during that period of so-called boom, I think, a lack of attention to the problems of some of the inherently weaker sectors of the Australian economy: manufacturing, tourism and other areas. Farming, I guess, is also another area I would pick out.

"We've also seen not only sectors ignored but a propensity to go out and spend money that wasn't there. The mining tax would be a classic example."

Mr Barnett said he was a "boom denier and a recession rejecter", adding that there were $177bn worth of resource projects that were in construction or committed in WA. "I would expect that the rate of economic growth in WA, the underlying rate, will be in the range of 4-6 per cent for many years to come."