The future is all about supply, not demand

PHASE one of the great resources boom of the early 21st century, a description invented for your amusement by Hogsback, was unquestionably about demand. Phase two, as will be demonstrated this week, will be all about supply.

Staff Reporter

Queensland and India are the examples chosen for this explanation of how the resources sector is morphing from demand drive to supply pull.

The end result, theoretically, will largely be a continuation of business as usual with stronger prices for coal and other commodities offsetting concern about any slowdown in the economies of the major coal importers, such as Japan, China and in the future, India.

In Queensland, home to the world’s biggest and most important metallurgical coal mines, supply is being crimped by a combination of floods and strikes.

From a coal-price perspective, for everyone not involved in the unpleasant events at seven of the mines operated by the BHP Billiton Mitsubishi Alliance (BMA), both the rain and the industrial action could not have occurred at a better time.

Without pits being filled with water, and workers walking off the job when they feel like it, the price of steel-making coal would undoubtedly be sliding lower than its current spot market level of around US$210 a tonne.

But, when you remove an annualised two-to-three million tonnes from the metallurgical coal market magic happens. The price stays up, and the longer it rains, and the longer the workers stay off the job, forcing BMA to declare force majeure, the longer the price will stay up because that’s what happens when supply is crimped in a market that is not growing as fast it was in the first phase of the boom.

In India, a supply event is occurring in the thermal coal market where the astonishing incompetence of the government system in India is producing a supply shortage just as that country cries out for more coal.

That demand from Indian industry, which is surprisingly strong as The Hog will shortly demonstrate, is being met by a rising tide of imports from reliable thermal coal producers such as Indonesia and Australia.

But, in the Indian coal industry which ought to be cashing in on high demand there is nothing happening, or as close to nothing as can be imagined. Supply, in other words, is failing to meet domestic demand.

Best example of how bad things are in India can be found in the eastern state of Jharkhand, located to the northwest of the giant city of Kolkata.

Officially, the government of Jharkhand calls itself the “land of coal”. That, it might be – but it’s certainly not the land of coal mines, because years of corruption at the private and government sector have seen attempts to expand coal production fail repeatedly.

Back in 2004, as the demand phase of the global resources boom started to crank up, a number of blocks of land where released by government for private-sector companies to develop.

Nothing has happened since, except a series of inquiries which culminated a few weeks ago with an audit report which claimed the release process had cost the country US$210 billion in potential lost revenue.

Anyone who has visited India on a business trip, or who followed events before and after the 2010 Delhi Commonwealth Games, does not need an explanation of Indian incompetence, or the impossible nature of multiple layers of government which hamstring every attempt at investment – until all the palms being held out are thoroughly greased.

What the Indian coal supply crisis means – and it is a crisis given the country’s acute shortage of electric power – is that imports will be required to keep the country functioning.

From a thermal coal-price perspective the Indian supply issue is made even more important by this week’s analysis of demand in major economies by economists at HSBC bank.

Using a nifty, colour-coded illustration, the HSBC boffins constructed a “heat map” based on the purchasing managers index of major economies. The PMI, which is an advance guide to demand for all sorts of goods and services, was below 50 (showing an overall economic decline) in countries such as Australia, China and Europe.

India’s PMI, at 54.7, was the highest in the world, almost matched by Taiwan at 54.1 and closely followed by the U.S. at 53.4.

Too much can be read into PMI analysis, but it is a factor in London analysts predicting that the thermal coal price of $US115.20 agreed this week by Xstrata and Tohoku Electric will be the low point in the current coal-price cycle.

Described as better than expected by analysts, the Xstrata price is higher than the $110 for coal for three-month delivery in Asia, and $100/t in Europe. It is, in fact, what the Financial Times headlined: “End of downward spiral for thermal coal”

And why is the end in sight?

Because supply is being crimped in India and other producing countries such as the US through a combination of government environmental edict and government incompetence.

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