As one of the few developed economies to make a lot of its money by exporting commodities, Australia should be over the moon about the resources boom.
But it’s not without its problems. Particularly when that boom threatens to overwhelm the infrastructure that actually enables the resources to leave the country in the first place. Let me explain.
Delays at the port of Newcastle, on the country’s west coast, are so bad that Prime Minister John Howard has refused to rule out the government taking control of the facility. Seventy-two ships were stuck at Newcastle at the start of this week, with each one expected to be left waiting there for about 28 days. There were 69 ships queuing last week, and an average of 23 a week in 2006.
And it’s all down to one rather old-fashioned commodity…
The delays at Australia’s Newcastle port are down mainly to one commodity – coal.
With electricity demand increasing by 13% a year, China’s power plants – 78% of which are run on coal – are working overtime. And when you factor in that coal production in the People’s Republic is not increasing significantly, it’s no surprise that China has just become a net importer of coal after years as an exporter.
And that’s why there’s a sudden bottleneck at Newcastle, the world’s largest port for coal shipments. The fields of the Hunter Valley on the outskirts of the town can mine as much coal as they want, but it’s not getting out of the country anytime soon.
“There has been an extraordinary expansion in coal exports”, said Australian prime minister John Howard, “and it does sometimes happen that the amount of coal to be exported runs ahead of capacity of the ports to handle it.’
It’s a headache many shipping companies don’t need, considering they’re already paying extremely high prices for new vessels.
According to Stamatis Molaris of Quintana Maritime Ltd on Reuters, ‘The hardest asset to buy right now is a bulk carrier.’ Speaking on the sidelines of a maritime shipping conference in New York, he told the newswire that ‘Dry bulk rates are so strong right now that the prices for some [vessel] asset classes are double what they were a year ago.’
According to a Bloomberg report last week, shipbuilders like Hyundai Heavy Industries will be able to charge ‘record-high’ prices to transporters like South Korea’s STX Pan Ocean Co. for another two years because of China’s growing demand for resources.
“High building prices will remain for the time being, at least until 2011-2012, because of low capacity and strong growth in China,” STX Pan Ocean Chief Executive Officer Lee Jong Chul said in a recent interview at Sea Asia 2007 in Singapore. The Baltic Dry Index, which measures the rates for shipping commodities like coal, grain and iron ore, has doubled in the past year as a result.
But how fast is demand increasing? Last month at the McCloskey Asian coal conference in Jakarta, Colin Gubbins, director of consultancy at the McCloskey Group, forecast that demand from China and India for coal would grow by 47.6% and 17% respectively this year. That translated as a 6.1% increase in demand to 325 million tonnes in 2007 for Asia as a whole, said a report on Reuters.
With Asia “on fire – only Indonesia can douse the flame of shortage”, he said. And yet there seems little hope of the country being able to do so. Yes, production is set to rise, but most of it will be absorbed by domestic demand. According to conference delegates, exports from Indonesia would increase by just two million tonnes over the next three years, to 150 million tonnes in 2009, and stay there until 2025.
Meanwhile, the McCloskey Group forecast that Chinese demand will hit 18.5 million tonnes by 2008 from 15.5 million today, while Indian demand will reach 34.3m tonnes in 2007, rising to 38.4 million next year.
The Chinese are now buying coal from the Australians, which means in turn that the Japanese now have to look to Australia and Indonesia instead of its closest neighbour for coal. “The coal sector in China has undergone a change,” said Mark Mobius, of Templeton Asset Management Ltd. in Singapore on Bloomberg.
Asian coal prices could surge 42% in five years, he said, which would be good news for China Shenhua Energy, the biggest coal company, China Coal Energy and Yanzhou Coal Mining. Prices, currently at about $54 a metric tonne could reach $78 by 2012, said Mobius, well ahead of the record $63.10 spot price set on June 24, 2004.
This is also great news for mining giants like Rio Tinto and BHP Billiton, looking to feed China’s appetite for coal. Meanwhile, the share price of the world’s largest exporter of coal, Switzerland-based Xstrata, could surge 22%, according to a recent report from Goldman Sachs. Another decent play could be US-listed Peabody Energy (BTU), the world’s biggest coal producer, which plans to expand in both Australia and China.
Meanwhile, clean coal technology is gaining ground against a background of high oil prices and concern about the environment. We wrote last year about the coal technologies (and other alternatives) that could replace or supplement oil supplies in the long term – click here for more: The future of oil – and how to profit from it.
Turning to the stock markets…
London shares stayed in the red yesterday as weakness in the mining sector persisted. The blue-chip FTSE 100 closed 48 points lower, at 6,449, and the broader indices were also weaker (with the exception of the FTSE Small Caps). Miners BHP Billiton and Vedanta were amongst the day’s biggest fallers, whilst defensive play Associated British Foods topped the risers. For a full market report, see: London market close (/file/28365/london-close-footsie-hit-by-miners-rate-fears.html
On the Continent, the Paris CAC-40 closed down 22 points at 5,835 as investors took profits, whilst the Frankfurt DAX-30 was down 66 points, at 7,282.
Across the Atlantic, the Dow Jones closed at a new record high of 12,803 – a 30-point gain – as JP Morgan Chase and Intel reported positive earnings. The S&P 500 rose 1 point to end the day at 1,472. However, Yahoo dragged the tech-heavy Nasdaq down to a close of 2,510, a 6-point fall.
In Asia, a stronger yen hit exporters and saw the Nikkei 225 index plunge 295 points lower to a close of 17,372 today. In Hong Kong, the Hang Seng closed 479 points lower, at 20,308.
Crude oil had fallen to $62.74 this morning, and Brent spot was down to $65.40.
Spot gold rose as high as $691.50 in Asia trading, whilst silver fell to $13.73.
And in London this morning, insurer Prudential announced a 1.4% rise in first-quarter sales. However, whilst gains were made in the US and Asian markets, the insurer was hit by a 23% decline in UK sales of products such as life insurance and pensions due to the non-renewal of a contract by Lloyds TSB.
And our two recommended articles for today…
Why you should hang on to your gold
– Gold investment in 2007 is starting to look a little crowded, says Adrian Ash. But don’t let that put you off. For more on why gold is still a safe bet – plus one opportunity in physical gold that’s the ‘buy of the century’, read: Why you should hang on to your gold
An investment to benefit from the credit crunch
– As credit expansion – and thus inflationary fears – continue, further UK interest rate hikes are a near-certainty. To fnd out what one investment will definitely be worth having when that happens, click here: An investment to benefit from the credit crunch