It might be the dirty old man of the fossil fuel industry, but the fact that there’s plenty of it out there compared to most other fuels means that it’s becoming ever more popular, even in these environment-obsessed times, particularly with China.
That’s great news for companies that are digging the stuff out of the ground – but it’s also great news for one world economy in particular.
Australia…
Coal prices have been rising steadily this year, partly due to congestion at a key port in Australia.
The Newcastle port is the world’s biggest coal export terminal, and has literally had ships queuing at it all year. In summer there was a peak of 79 ships waiting to fill up on coal for Asian power producers. And last week, to cut congestion, the port has cut back on export allocations for the fourth quarter of this year.
The problem isn’t so much that there’s not enough coal. As Dresdner Kleinwort Benson tells The Times, the key problem is that “China is building 70 giga-watts of coal-fired power generation every year and the world has not enough port or shipping capacity to handle the demand.” Even though the country is the world’s largest coal producer, it became a net importer this year.
Coal’s not the only commodity in demand in China. Heavy demand for iron ore to make steel means that miners such as BHP Billiton (BLT) and Rio Tinto (RIO) are expected to win 30% price increases in annual talks with Chinese steelmakers this year.
As John Gamaut in Australian newspaper The Age wrote recently: “this year, China will need enough ore to make enough steel to build high-rise apartments for 19 million new urban immigrants, make 8.5m cars, complete 17 major city airports and roll out tens of thousands of kilometers of railways, tunnels, bridges and elevated highways.”
That’s a set of very reassuring statistics for miners. But it’s also good news for Australians – the country exports more coal and iron ore than any other country, which is nice to know at a time when the shadow of the credit crunch hangs heavy over most developed economies.
Stephen Miller of BlackRock tells Bloomberg that “even if the US is going into some form of economic malaise, its impact on Australia won’t be as great. Australia is more and more linked into the fortunes of the Asian economy.” Australia relies on Asia for 60% of exports, and the US for just 6%.
That’s also been good for the Australian currency. In fact, Canada-based TD Securities Ltd reckons the Aussie dollar will reach parity with the US dollar by the end of next year.
However, we’d be reluctant to bet the house on Australia. Certainly it’s a commodity economy, which is good news in today’s China-led global economy. But it’s also heavily indebted, just like the UK and US, and has also experienced a very similar property bubble to our own.
With Australia’s interest rates sitting at an 11-year high of 6.5% and more likely to rise rather than fall, there’s plenty of risk of a nasty comedown.
There’s also the fact that the Australian dollar has benefited heavily from the carry trade (where investors borrow in yen or another low-interest rate currency, and invest in high interest rate currencies like the New Zealand or Australian dollars). As soon as the next bout of fear hits global markets, the carry trade currencies will more than likely see another setback.
So rather than betting on the Australian stock market, we’d just go straight for the driver behind the country’s success – the commodities boom. You can get broad exposure via BHP Billiton (BLT), which will benefit from the hefty iron ore price increases; or if you’re interested in playing coal specifically, Peabody Energy (NYSE:BTU) is the world’s biggest coal miner.
Also, as a somewhat risky sector play on the side, Eoin Gleeson recently wrote in MoneyWeek about the growth of the coal bed methane industry, which aims to convert the gas lurking in coal mines into usable, clean energy. Subscribers can read more here: China’s hot new energy play.
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Turning to the wider markets…
In London, the FTSE 100 ended yesterday 54 points lower, at 6,605, after a quiet day’s trading. Miner Kazakhmys topped the FTSE fallers after it announced that a flood at one of its mines would hit copper cathode production this year. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 was down 13 points, at 5,829, and the Frankfurt DAX-30 ended the day 27 points lower, at 7,974.
On Wall Street, weakness in gold and oil prices triggered a mild equities sell-off. The Dow Jones fell 22 points to close at 14,043. The S&P 500 was off 5 points, at 1,552. However, it was a better day for tech stocks. Search engine behemoth Google closed at an all-time high, and the tech-rich Nasdaq index added 7 points to end the day at 2,787.
In Asia, banks and exporters led the Japanese Nikkei up 94 points to a close of 17,159. And in Hong Kong, the Hang Seng had risen to 28,228 – a 457-point gain – at the time of writing.
Crude oil continued to fall this morning, last trading at $78.82. And Brent spot was at $76.58 in London.
Spot gold had also slipped lower today and was last quoted at $730.90, down from $732.80 in New York late last night. And silver had fallen to $13.18.
In the currency markets, the pound was at 2.0348 against the US dollar and hit a 4-week high against the euro before easing back to 1.4484. And the dollar was at 0.7118 against the euro and 117.23 against the Japanese yen.
And in London this morning, Northern Rock revealed that the Government’s guarantee has now been extended to all deposits, including those made after September 19, until financial markets become less volatile. Shares in Northern Rock were up by as much as 9% in early trade.
And our recommended articles for today…
Where next for UK house prices?
– Brian Durrant has always maintained that the UK housing market will be the victim rather than the assassin of the economy. For more on the current outlook – and whether City job losses could finally pull the rug out from under the London market – click here:
Where next for UK house prices?
The stocks set to benefit from the credit squeeze
– The credit crunch may have hit the big mortgage banks hard. But as the big lenders start to turn away more prospective borrowers and higher food and fuel costs begin to bite, there’s one sector that will really come into its own again. Click here to find out more:
The stocks set to benefit from the credit squeeze