One UK company to benefit
China needs steel. LOTS of steel.
To make that steel, it needs coal.
They get their coal shipped in from Australia. Trouble is Australia’s infrastructure cannot cope with China’s demand.
It’s the same story for most commodities across the board: The world needs more resources than ever... the countries that produce those resources find it harder and harder to keep up the supply.
“Peak Infrastructure” will keep pushing commodities higher than ever.
No more so than coal...
This leading ‘commodity price’ indicator practically proves it...
You see, a staggering 93% of all goods in the world travel via sea.
That’s why the shipping sector is one of the most important leading indicators of the global economy. In fact, it’s one of the best leading indicators for the commodities sector that I know.
One of the most important of these is the Baltic Dry Index (BDI).
The BDI measures freight rates for bulk commodities such as iron ore, coal and grains. It considers 26 shipping routes measured on a timecharter and voyage basis and so provides an assessment of the price of moving major raw materials by sea.
Because the supply of large carriers tends to remain very tight, with long lead times and high production costs, the index can experience high levels of volatility if global demand increases or drops off suddenly.
The index collapsed in the latter part of last year and many commentators were fretting about what this meant for the global economy. It plunged by half to 5,615 in January, after hitting an all-time high of 11,039 in November. Market watchers claimed it was a portent of a global recession and a commodity-price slump… but the doomsayers were wrong. Dead wrong.
The BDI Baltic Dry index has actually risen by more than 60% since January - and I think it could go even higher.
Yet again, it is all down to “Peak Infrastructure”.
Opec can’t pump enough oil, because their infrastructure is outdated… the US can’t refine any more oil, because the infrastructure can’t cope… and the global shipping industry does not have enough ships or ports to cope with Chinese demand.
This is going to keep commodity prices high for the foreseeable future, especially coal...
Taking coals from Newcastle is no mean feat
Ships have to queue at many Chinese ports in order to dock, but by far the worst situation is seen in Australia.
Coal is vital in steel production and China is eating up steel products at an astonishing rate. The main supplier for this coal is Australia via is Newcastle Port.
Forty-one coal ships were waiting outside Newcastle to load as of midnight on 23 April. Coal ships waited for 11.46 days to load coal in the week ending 21 April, versus 0.55 of a day for general cargo vessels.
This situation has been happening all year. There is a long line of ships waiting to be loaded at the port, but there isn’t the infrastructure to cope with the demand.
This tightness of supply has given companies such as BHP Billiton and Rio Tinto leverage in their coking coal and iron ore pricing discussions with China. And it will continue for quite some time, but maritime figures show there are about 9,000 ships under construction worldwide, which is more than at any time in history.
When talking about the slump in the BDI in January I said I thought that pricing discussions were responsible for the fall in booking and that I expected the BDI to rebound in the second half of the year. It looks like I was being too cautious – it has rebounded already.
Bottlenecks at ports in China an Australia look set to continue; this will keep the market tight and keep coal prices high.
My Smart Commodities UK readers are well placed to profit from this critical situation. If you’d like details on the one stock I recommend you buy to potentially profit from this coal phenomenon, find out about a subscription here.
Regards
Garry White
Editor Smart Commodities UK
