Down in Australia, where coal and other commodities are the life blood of the economy, there have been long faces as the price of coal has tumbled 60% from its peak a year ago.
The reasons are easy to see. Just take a walk down to the end of the pier at Newcastle, the port in NewSouth Wales through which Australia’s coal is transported to Asia. Last summer there was a queue of ships waiting to be filled with the precious black commodity. Today, any ships lying offshore are more likely to be idle, waiting for some instructions rather than waiting for their turn at the loading bay.
Coal exports in January were worth A$4.5bn, a 20% drop from the previous month and February is unlikely to have been any better. ‘It’s a buyers’ market said one coal producer.’ The market is very weak and there is plenty of coal out there.’
No wonder the mood is as black as the coal itself…
Just a year ago coal miners were cranking up production just as fast as they could. Nobody foresaw an end to the era of high prices. But the recession has changed that. Even the mighty Chinese economy is not immune from its chill wind.
Why this new deal could spark a revival in the coal market
But let us get a little perspective. Because the gloom could lift much sooner than people realise. Indeed only this week Xstrata, the world’s biggest producer of power station coal settled a supply agreement with Japan’s Chubu Electric Power at a price of $70 per ton. True this is some way below the $125 per ton that Chubu settled for last year. But coal industry watchers in Australia are still happy. And here’s why this deal should set the benchmark for other annual supply negotiations taking place around this time.
You see, $70 per ton is still double the price that coal producers were receiving two years ago before the super-cycle theme got an airing and sent commodity prices into the stratosphere. It is still a level at which any low- or mid-cost mine should comfortably be in profit. And it could also mark the low point of the cycle.
Nobody believes that the long-term picture has changed. Population growth, industrialisation, urbanisation, the desire for motor cars, fridges and washing machines – all of these trends are still very much in place even if temporarily put on hold.
The Australian Bureau of Agriculture Resource Economics reckons that China will soon regain its appetite for Australian commodities. It says that the financial crisis is only likely to put a temporary dent in its massive and growing demand for iron ore and coal. The Bureau acknowledges the likelihood of a slump in export earnings this year.
But it predicts that over the five years to 2014, Chinese steel production will grow by an annual average of seven per cent a year. That means that by 2013-14, it will be consuming up to 44 per cent of the world's steel output. That’s more than enough to ensure a healthy demand for coking coal.
China’s new multi-billion dollar kick-start for commodities
Some observers think that the upturn might come sooner. You see, the hiatus in demand is as much down to the unwinding of stockpiles that have built up at Chinese ports. But these stockpiles will soon be run down. And China is ready to embark upon a multi-billion dollar construction package to revive its flagging economy. That could be a major fillip to demand for coal and metals.
So it could be a good time for investors to revisit the commodities theme. The share price of the big mining stocks Rio Tinto and BHP has been edging up in the last three months. And I also like the high yielding shares of Anglo Pacific. Last year it received £22m of royalty income from its Australian coal interests. Equity investors should take the long term view – now more than ever.
What’s interesting is that here are only two other coalfields in the world that can rival Queensland’s massive Bowen Basin. One of them is much closer to China. It has barely been exploited and could make a fortune for companies and investors that get involved now.
In fact, I’ve found a way in. Click here to learn how you can get hold of my latest research and receive this great little coal tip by return.
Good investing,
Tom Bulford
For The Penny Sleuth
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